It’s An Iceberg Of Interest Rates, But Insurers Are Melting

If low interest rates are the tip of the iceberg, at least the life insurance industry is not the Titanic heading for it, but the industry is going to need a smaller boat.

Although that metaphor mashup was not Tim Pfeifer’s doing, he is exploring the issue in his presentation, “Low Interest Rates – The Tip of the Iceberg?” during the Retirement Industry Conference. As president of Pfeifer Advisory, he helps companies develop products and strategies.

Interest rates ticked up last year, but they are not expected to grow substantially any time soon, adding to the drag from a decade of low rates.

“The reason I titled the session that is because I think the pain points around interest rates, are just starting to really happen in a major way,” Pfeifer said. “Companies were able to deal with a level of rates declining over time, but in the last year or two with COVID and other things, we've reached a new level of kind of pain and the reaction to that is just starting to happen.”

Smaller companies had a bit of a breather when the Federal Reserve ticked rates up a little. But, generally, carriers have had to react fast to difficult conditions. One of the reactions Consolidation is one of the reactions Pfeifer has been seeing. Hence, the smaller boat.

“People at small- to mid-sized companies told me, quite frankly, that if they hadn't seen that bump in the 10-year from 50 basis points up to 150 to 200, they probably would be out,” Pfeifer said. “They would just be selling off. We'll see, but I suspect the pain point is still there for a lot of these companies.”

Product Pressure

The pressure is particularly acute for companies with a small shelf of fixed products.

“If you're a company primarily focused single premium deferred annuities on the fixed side or only guaranteed UL or term insurance, and that's all you do, you just don't have a lot of levers to pull when it comes to managing your business,” Pfeifer said. “I think it's going be real tough for those companies, frankly, to make it unless we see a real pop in rates. The pie has been shrinking. If you're competing against large, multi-line companies who have more outs and more resources, you can only live off in-force for so long.”

The product challenges also apply to the annuity side. Companies that are focused on fixed annuities or variable annuities with guarantees have been shifting their products or getting out of the business altogether.

“Companies getting out of selling fixed annuities, at least temporarily, or trying to sell off their VA guaranteed business, which is, more interest rate-sensitive than you might think,” Pfeifer said, adding that carriers are also backstopping. “The biggest growth area in annuities right now is the use of reinsurance on the fixed side, either for capital reasons or to partner with reinsurers or related entities that can generate higher returns on assets.”

Another growth area is the rise of registered index-linked annuities. Pfeifer said he expects that interest will continue to grow for marketers who like the message of upside potential with some downside protection, but at the same time shifting more of the risk to the consumer. Consumers, in turn, are willing to accept the risk exposure for more equity market benefit.

Rising Rates, Stable Commissions

Companies are planning for a long, glacial rise in interest rates over the next decade.

“I see companies today that assume rates will climb maybe 100 basis points in the next 10 years or so,” Pfeifer said, adding that slow growth is preferable. “There's an upside and a downside to rates going up fast. If rates pop too much too quickly, then then you have the whole disintermediation problem, which creeps in and so a lot of your in-force walks across the street and buys a new policy.”

That would be destabilizing for companies, but not so bad for producers helping consumers trade up. And that is not the only good news for agents.

Commission rates have not been reduced much and probably won’t be, even though some carriers are struggling to sustain the cost.

“The one area that hasn't declined as much as it probably should is sales commission,” Pfeifer said, adding that agents can still get up to 8% upfront commission on a 10-year surrender charge product. “People on the sales side will say, well, it's tougher for us to sell now, so we have got to get paid more for it. But I think if you talk to a lot of carriers, they would say that everyone has sort of given up something, but agents have given up less than, than most others in this picture.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]

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