Following Fed comments, insurers brace for added premium costs

Following comments Friday from Federal Reserve Chairman Jerome Powell who said tackling inflation will cause economic pain, experts interviewed raised the likelihood of rising premiums on annuities and life insurance products as interest rates climb.

Premiums on multi-year guaranteed annuities are already up a whopping 15% to 20% in the last six months and there’s no end in sight.

Powell, in an unusually direct and concise speech before leading economists gathered in Jackson Hole, Wyoming, said the Fed won’t reverse course and cut rates even though there are some current signs of economic stability.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation they will also bring some pain to households and businesses,” Powell said in an 8-minute address. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

“Insurance executives are increasingly becoming aware that they are under significant pressure due to inflation and the effects of climate change.”
— Mayra Rodriguez Valladares, managing principal at MRV Associates

For the insurance industry, spiraling insurance rates create new challenges as companies are big holders of bonds, the value of which are declining with continued interest rate in increases.

“Insurance executives are increasingly becoming aware that they are under significant pressure due to inflation and the effects of climate change,” said Mayra Rodriguez Valladares, managing principal at MRV Associates, a financial consulting company based in New York City. “They will have to change their current business models, which means they will have to raise premiums on any new policy. The premia that they are receiving now on current policies is being impacted by rising inflation.”

In essence, Valladares said, Chairman Powell told investors that the “inflation dragon has not yet been slayed.”

“I try not to crystal ball it, but to be honest, if they're raising rates to tame inflation and inflation continues to rise, I would expect rates to continue to rise for at least a relatively short period of time,” said Mark Williams is CEO of Brokers International. “Let's call that six months, a year year, or 18 months.”

Some experts, however, said that premium increases may not necessarily be an inevitable consequence of rising interest rates.

“Some believe carriers’ product renewals may not increase as a result from such severe and fast rate hikes because when rates rise, the values of older bonds purchased lose value in insurers' general accounts,” said Ryan Brown, corporate counsel at M&O Marketing, an independent marketing firm headquartered in Southfield, Mich., who added, “We saw this slightly take place in early 2018, but obviously that period was nothing like what has taken place since early 2022.”

“This is all an interesting dichotomy that many CIOs will be charged with dissecting and managing, so that the value proposition of annuity products stay as strong as possible for current and prospective policyholders,” Brown said.

Some silver linings

Williams and others, too, sees some silver linings in rising interest rates, especially for seniors.

”The older people get, the more they shift their money from risky investments to safer, more conservative investments,” he said. “And right now, we're seeing a rise in interest rates, which is very favorable for older people to put their money in savings.”

In the last two decades or so, Williams noted, the bull market has been extremely beneficial for older investors, despite being more risky.

“Now that interest rates that are up, if I was your advisor I might say let's take some of the gains that we've had over the last few years and slide that into safe money because now safe money is paying you three, four or five percent and that’s a big raise,” he said.

Combined with scheduled increases in Social Security, Williams said, retirees can benefit from rising interest rates.

“So imagine if you had a million dollars sitting in the bank and you were living off that money. And you went from a 1% interest rate to two, or three, or four percent interest rate, you just got yourself a healthy raise,” he said.

Alexa Foley, an associate at Sloane & Company, also said rising rates are not all bad.

“It is impossible to predict the future of the markets, however, higher rates are generally good for both accumulation and income annuity guarantees,” she said.

Rates may spur innovation

The rising rate environment may also spur new product innovation, which has been moribund in recent years, Williams said.

“This situation gives them room to create more product,” he said. “Product innovation has relatively stalled in the last few years. And now we're seeing a lot more product innovation because there’s more room for companies to create product again. That's interesting.”

Still, the current environment with a fluctuating stock market, rising inflation, and spiraling interest rates is a condition the industry might have to contend with for a while.

“This decrease in [bond] values makes it difficult for insurance companies to manage their liabilities,” said Rodriguez. “This will lead them not only to raise premiums but also, they are likely to invest in riskier assets like equities or alternative assets in order to meet their liabilities, which are worsening because of climate change.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].