Optimal Conditions for a Life Insurance Co

[Cash]

I have tried to answer this question in my head but I am unsure of the answer.

So what is the optimal economic environment for a life insurance co?

Of course this will depend on the company but since these companies are highly regulated it would make since that some conditions are better than others. Right now we are in a low interest rate environment which means a couple things; bond prices are high, rates are low. Would it be better if the rates went up even though that means the bonds lose value? Is inflation or deflation or disinflation desirable?

What is your understanding?

 

[DHK]

The best condition for a life insurance company is when people stop dying... or people die without having their policy in force. Happens all the time.

Think about it: These life insurance companies are 100% legal reserve companies. They have enough money on hand to pay out ANTICIPATED claims on their policies AND earn a profit above and beyond that. They build all that into the pricing of their products.

Now, if you're talking about cash value performance and the investment performance of the company's general account... now we're talking about long-term bond rates. Bond rates reached their peak in the 80's & 90's. These long-term bonds are good for about 30 years... which is the time we're in right now. Quite a few companies are wondering where to look for safe money returns.

Life insurers scrape for yield | LifeHealthPro

That's why some insurance companies have cut back or suspended sales on some of their fixed annuity products. Assurity comes to mind. They have a series of Annuities that they have suspended sales on because of the current interest rate environment.

Indexed products would seem to be a great answer for this dilemna... (less liability to produce a guaranteed result from the general account), but I'm still not sold on IUL contract design (while making it profitable for me to sell). I'm a fan if fixed indexed annuities... but not yet championing for IUL.

 

[Cash]

I guess an interesting question to get answered is are the insurers holding on to these bonds until maturity. If they are buying right after an auction and then holding for 20, 25, 30 years then yeah, rates are all that matters. However, if they are selling these things before maturation then they can take advantage of the corresponding increase in the price of the bond. The real bull market of the last 30 years has been in US Bonds, not stocks but those people were not buying for rate they were buying for value. I would be interested in hearing a CFO of a company say wither they would take higher rates even if the value of the bond portfolio took a major hit.

 

[VolAgent]

Remember, if an insurance company sells a bond due to its price being high, they then have to turn around and find a new bond. I don't follow bond prices, but it bond traders would have to be paying a premium above the bonds fair value to make it profitable to the insurance company. Otherwise they just sold a bond with a high rate and now have to go buy a low rate.

 

[ATM]

The best conditions are when the yield curve is less flat and inflation is high as it makes paying claims in debased money less expensive.

With a steeper yield curve the company invests long at high rates and pay interest at short or midterm rates and pockets the spread.

Today is not a great time for insurance company bottom lines. Returns on equity are dropping, portfolio rates are dropping and to retain and attract customers they need to pay out relatively high rates.

Their margins are being cut and inflation is low.

 

[Stevekobrin]

In all truth, I don’t have a strong enough grasp of macro economic technicalities to give you a comprehensive answer to this question. I will say this, however: when frontline carriers and reinsurers have concerns about reserves and credit availability, they tend to tighten up their underwriting. They also tend to slam people with high increases when term policies renew, and dramatically reduce interest rates in cash accounts. So my indirect way of answering your question is that we need factors to be in place so that insurers will be comfortable with the size of their reserves, and confident of their access to credit.