Life insurers should beware if interest rates remain at all-time lows, according to a report from Fitch Ratings. Even so, a prolonged period of low interest rates will most likely affect company balance sheets but does not threaten solvency.
"While Fitch believes this does not pose an immediate solvency issue for the industry as a whole, it is concerned that ongoing spread compression further weakens the industrys already strained ability to grow earnings and capital in the current environment of low interest rates, poor credit markets and volatile equity markets," said Julie Burke, managing director at Fitch.
States set minimum yields on life insurance and annuity contracts. This 3% minimum guarantee has become high relative to interest rates, increasing the financial risk associated with such products and greatly reducing profit margins.
Although the National Association of Insurance Commissioners has approved a new model law that would change the minimum rate, it will take some time for all the states to adopt their own version of the law.
Fitchs report focuses on this disparity between required minimums and the interest rate environment.