Fed Rate Hike

Modest Impact Anticipated

Insurance companies have long struggled with poor investment yields, but the recent hike will probably do little to help.
By: | January 6, 2016

Last month’s Federal Reserve interest rate increase may impact property/casualty insurers positively, but it’s too soon to tell.

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“I expect that the impact of a single quarter-point hike will be very modest on the insurance industry, whether property/casualty or life,” said Robert Hartwig, president of the Insurance Information Institute in New York.

More important, he said, will be whether the Fed continues its rate-raising activity during 2016.

“The central bank will likely increase [its overnight benchmark rate] three or four times in 2016, so short-term yields are likely to move up from where they’ve been at for the past seven years (nearly zero) to between 1 percent and 1-and-one-quarter percent in 2016,” said Hartwig.

If that happens, he said, yields on traditional fixed income assets held by insurers should rise gradually through the course of 2016.

Robert Hartwig, president, Insurance Information Institute

Robert Hartwig, president, Insurance Information Institute

There are few more significant challenges to P&C insurers than declining investment yields, according to Fitch Ratings, which downplayed the significance of the central bank’s moves.

“Investment yields in insurers’ investments fell again in 2015 and will likely fall further in 2016 unless long-term rates meaningfully rise,” Fitch stated.

Hartwig, however, sees the Federal Reserve’s decision to raise its benchmark interest rate by a quarter of one percent, to between 0.25 percent and 0.5 percent, as a good omen.

“So long as the economy stays on track, insurers should benefit from higher interest rates as well as increased business exposures on things such as vehicles and homes,” he said.

He predicted that rates and exposures will increase in 2016. Other upsides to the financial turnaround for insurers will hopefully include stronger construction activity as well as increased payrolls, which will help propel workers’ compensation premiums written as the economy continues to expand at a modest pace, Hartwig said.

The hike offers “insurers no real relief from the pain of this long-term low interest rate environment” and will have “no immediate impact” on insurance companies. — Ken Johnson, vice president, A.M. Best.

A.M. Best was more circumspect about the impact of the rate change.

The Fed’s move primarily affects “the shorter end of the interest rate term structure, which doesn’t impact insurers with predominantly longer-term bond holdings,” said Ken Johnson, a vice president at A.M. Best.

“This initial move also doesn’t ease the pain for older spread-based products with higher guaranteed crediting rates,” he said.

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It offers “insurers no real relief from the pain of this long-term low interest rate environment,” he said, and will have “no immediate impact” on insurance companies.

Nonetheless, Fitch maintains a stable outlook for the U.S. P&C sector in part due to strong capitalization from lighter-than-average catastrophe events.

“However, the industry’s revenue production is dogged by premium rate competition in most segments and limited revenue growth in a still-recovering economy. These factors, combined with weak investment yields, mean that P&C profits will be under pressure in 2016, it said.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]