Second Amended Complaint Filed In The Brach Family Foundation Lawsuit Against AXA For Cost Of Insurance Increase

Late last week, a Second Amended Class Action Lawsuit was filed in the United District Court, Southern District of New York in the Brach Family Foundation vs. AXA Equitable Life Insurance Company case we first wrote about on February 2, 2016.

The 35-page document expands and adds to the original 18-page Class Action Complaint filed February 1 of last year, and follows on the heels of two unrelated lawsuits filed against AXA last week.

The suit, brought on behalf of the foundation and “similarly situated owners” of Athena Universal Life II policies subjected to the COI increase, alleges the increase was “unlawful and excessive” and that AXA violated “the plain terms” of the policy and “made numerous, material misrepresentations in violation of New York Insurance Law Section 4226.”

The rate hikes, which were applied in March of last year, were targeted to a group of approximately 1,700 policies issued to insureds with an issue age of 70 and up, and with a policy face amount of $1 million and up.  Since the increase was focused on this “subset”, the suit alleges that the increase was unlawful because the policies require that if a change in rates occurs it must be “on a basis that is equitable to all policyholders of a given class.”   The suit points out that there is no “actuarially sound basis” to treat policyholders differently simply because one may be 69 and one 70 at issue age, or because one may have a policy with a face amount above or below $1 million. The suit also points to actuarial studies that indicate there are actually “lower mortality rates for large face policies.”

The suit notes that there are six “reasonable assumptions” that COI changes can be based on: expenses, mortality, policy and contract claims, taxes, investment income, and lapses. AXA has stated that the COI increase was based on two of those: investment experience and mortality.

In order for the increase to be “based on reasonable assumptions” for investment income, the increase has to “correspond to the actual changes in investment income observed,” according to the lawsuit, which points out that “since 2004, there has been no discernible pattern of changes in AXA’s publicly reported investment income” that would “justify” any type of COI increase.

AXA defended its increase, in part, by stating that insureds in these policies were dying sooner than projected. However, the lawsuit claims that “mortality rates have improved steadily each year” since the policies were issued.   According to the lawsuit, the Society of Actuaries has performed surveys comparing observed mortality of large life insurance carriers to published mortality tables and has found that the “surveys have consistently showed mortality improvements over the last three decades, particularly for ages 70-90.”  The suit points out that AXA informed regulators in public filings as late as February 2015 that it “had not in fact observed any negative change in its mortality experience,” and answered no when asked if “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience.”  When questioned whether there may be “substantial probability” that the illustrations used for sales and inforce purposes could not be “supported by currently anticipated experience,” the carrier again answered no.

The suit alleges that if AXA’s “justifications” for the COI hikes are valid, “then AXA applied unreasonably extreme and aggressive haircuts to the 75-80 mortality table when setting original pricing of AUL II, and these pricing assumptions were designed to make AXA’s product look substantially cheaper than competitors’ and gain market share” and by doing so, AXA engaged in a “bait and switch” which resulted in “materially misleading illustrations, including all sales illustrations at issuance” in violation of New York Insurance Law Section 4226(a).

By focusing the increase on older aged insureds, the suit alleges AXA “unfairly targets the elderly who are out of options for replacing their insurance contracts” and forces the policyholders to either pay “exorbitant premiums that AXA knows would no longer justify the ultimate death benefits” or reduce the death benefit, lapse or surrender the policies.  According to the lawsuit, any of these actions will allow AXA to make a “huge” profit from the “extraordinary” COI increase.  According to the lawsuit, AXA originally projected that the COI increases, which ITM TwentyFirst has noted ranged from 25-72%, would increase “profits by approximately $500 million.” The lawsuit also notes that in its latest SEC filing, the carrier said that “the COI increase will be larger than the increase it previously had anticipated, resulting in a $46 million increase to its net earnings,” which the suit points out is “in addition to the profits that management had initially assumed for the COI increase.”

For a copy of the Second Amended Class Action Lawsuit in the case, contact mbrohawn@itm21st.com

Life Insurance: An Efficient Way To Pass On Wealth

Life insurance has been a challenging financial product to manage in the last year or so and we have written often about the issues that surround this asset. But we also believe that this is a powerful financial tool. In our last blog entry we wrote about its use to mitigate the negative effect of a tax law change that may occur in 2017. At ITM TwentyFirst, we manage life insurance, we do not sell it. In fact, we are one of the few firms that manages life insurance without earning any compensation from sales. We show our support not just by managing in-force business as efficiently as possible for trustees, grantors, and especially beneficiaries nationwide, but also by pointing out the value of life insurance as a tool to efficiently leverage assets for the next generation, especially in a trust setting. We believe strongly that life insurance, when selected properly and managed efficiently, can be one of the most important assets a person owns.

For many insureds, the internal rate of return on a life insurance policy held in trust is appealing compared to alternative fixed investments, even if fixed interest rates begin to kick up a bit over the next few years. And the use of life insurance for older aged insureds can actually make the golden years more enjoyable by freeing up additional cash flow.

Here’s an example: A couple, both age 65, have come to an advisor for financial advice and estate planning as they enter their retirement years. Assuming that both are in good health (preferred, non-smoker underwriting), they could purchase a $1,000,000 Survivorship Guaranteed Universal Life (SGUL) policy from an A+ AM Best rated company for an annual premium of about $13,420. If you have attended any of our education sessions, you know that a GUL policy has a required fixed premium, one that, if paid in full and on time, guarantees the policy death benefit no matter what happens with interest rates or other market factors. (1) A survivorship policy, often used in estate planning cases, pays a death benefit at the second of the two insureds’ deaths.

If we calculate the internal rate of return (IRR) on the death benefit (2), in this example, we see that the policy’s rate of return (shown in spreadsheet to the right) is extremely attractiv1-irr-fixede. Even if the insureds do not pass away until their mid – 90’s, the rate of return on the premium funding the policy will be over 5%. Should death occur earlier, the rate of return will be much higher. Remember that a life insurance death benefit is received free of income tax and, if placed in a trust, is not subject to estate taxes. With this particular policy, the death benefit is guaranteed, locking in the returns. (3) What other asset can your clients purchase that will enable them to pass on wealth this efficiently?

For the client who wishes to maximize his or her retirement lifestyle while also leaving a legacy, life insurance can actually help to smooth out retirement income. Though an annual premium payment will have to be made to the trust (in this case, equal to 1.34% of the death benefit), the comfort in understanding that a known, completely tax-free amount will pass to beneficiaries at death can free up additional funds for retirement activities.

Life insurance is a powerful financial tool. When properly designed and managed wisely, it can create a legacy more efficiently than almost any other asset. As we mentioned in our last post….The next few years will provide challenges and opportunities for…advisors to help clients rethink their financial plans and goals. ILITs will remain a viable tool for leveraging assets.

  1. ITM TwentyFirst does not sell life insurance, nor do we advocate one type of life insurance. Every life insurance purchase should be based on the personal situation (health, cash flow, risk tolerance, etc.) of the insured. There is no one “best policy” for all situations.
  2. The IRR on death benefit is the net rate of return that would need to be earned if the cumulative premium were invested in an alternative asset.
  3. The policy death benefit is guaranteed as long as the premium is paid in full and on time. While market risk is eliminated, carrier risk must still be monitored.

Latest Federal Reserve Hike Viewed as Generally Positive for Life Insurance by Moodys

Less than two weeks ago, we reported that Moody’s had downgraded its 2017 outlook for the life insurance sector from Stable to Negative. A new Moody’s report published after the Federal Reserve raised its benchmark federal funds target rate by 25 basis points last week indicates that hike will benefit life insurers and “help reverse the downward march in investment portfolio yields.” (1)

The federal funds rate is the interest rate that depository institutions charge each other for an overnight loan. Banks are required to keep a minimum reserve requirement and will move monies back and forth, charging a rate based on the target rate set by the Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body.1-fedres2

As can be seen in the graph to the right,
the federal funds rate that is actually charged dropped dramatically through 2008 as the target rate sank and stuck at 0 to .25 percent. A bump in December of 2015 pushed the target to .25 to .50 percent. Last week’s increase pushed the target rate to .50 to .75 percent.

While the rate only pertains to overnight loans among very creditworthy financial institutions, its effect is actually broader since banks use it for the basis of all other short-term rates. It also indirectly affects longer-term rates, such as home mortgages. An article in the Wall Street Journal yesterday declared, “The era of the ultralow mortgage is over.” It also pointed out that after the US election, even before the Fed acted, rates on a 30-year mortgage jumped .76 percentage points, to 4.38%, (2) the “post U.S. election bump in yields” we mentioned in our prior blog.

The increase in long-term rates would be a welcome relief to life insurance carriers who have struggled mightily in this low interest-rate environment. Insurance companies attempt to match their investment time horizon with their liabilities, and life insurance is a long-term liability. The Moody’s report points out that “new money rates on long-duration investments are more important for insurers,” a good benchmark for new money rates of life insurers being the 10-year treasury plus a credit spread, which has seen a “100 basis point rise…from… summer lows.”

Should the long-term rates become sustainable, Moody’s sees the profitability of older annuity blocks improving and believes “interest-sensitive life insurance,” like universal life, would benefit, along with other “long-tailed specialty products” like long-term care, both of which have seen dramatic cost increases in the last few years. With increased rates, the pressures on carrier reserves would lessen, and the chances of GAAP charges and write downs would decrease.

The Moody’s report believes this might be a first step toward a “more normalized policy rate environment that would be conducive to better long-term operating conditions and profitability.” Let’s hope so, but let’s also remember that the current target rate hike, only the second in 8 years, only pushed the rate from .50 to .75 percent. A decade ago, a “normal” fed funds rate was 5.25 percent. We are a long way from that.

  1. Moody’s Sector Comment, December 14, 2016, Financial Institutions, United States
  2. Rising Rates Ripple Through Mortgage Market, Wall Street Journal, December 19, 2016

Northwestern Mutual Dividend and Crediting Rates Drop, Expenses Rise

Over the last two years, we have written extensively about the impact of the low interest rate environment on life insurance policy performance, primarily Current Assumption Universal Life policies. Many carriers have pointed to low interest rates as a primary cause for their cost of insurance (COI) increases in these policies. Anyone who has attended one of our webinars on life insurance policy subjects (see: https://www.itm21st.com/Education) knows that we describe Universal Life as a living Excel sheet—you can see each expense and credit in the policy if you know where to look.

Whole Life insurance is a bit harder to decipher. It is the proverbial “black box” of life insurance and the moving parts that drive performance are much less transparent. A Whole Life policy has a guaranteed cash value shown in the “as sold” illustration provided at policy issue and a projected total cash value driven by dividends paid on the policy. The dividend is determined by the actual experience of the company. There are three areas that affect the dividend paid by the carrier.

  1. Investment Earnings: If the earnings of the insurance carrier are more or less than assumed, the dividends will be affected positively or negatively.
  2. Mortality: If the actual carrier mortality experiences are more favorable (fewer deaths occur than expected), the effect on the dividend will be positive.
  3. Expenses: If the carrier’s actual expenses are worse than assumed, then the costs allocated to each policy increase. Accordingly, dividends may be negatively impacted.

Last week, Northwestern Mutual released its 2017 dividend scale and according to information received by ITM TwentyFirst we expect a decrease in their dividend scale on Whole Life policies, driven by lower earnings as well as an increase in some policy expenses.

According to that information, the investment earnings portion will experience a drop in the dividend scale interest rate for 2017 to 5% from the 2016 rate of 5.45%. The mortality component will experience no changes from 2016, but the carrier has stated that expense charges in the policies will see an increase. Overall, dividends paid on Whole Life policies will “generally be lower” in 2017.

For Northwestern Mutual ’s Universal Life policies, which are not participating (i.e., they do not receive dividends), the company announced a crediting rate drop “consistent with the 0.45% decrease to the dividend interest scale rate.” Additionally, the company announced that its Universal Life policies, both fixed and variable, will see expense charge increases similar to those found in Whole Life policies.

This announcement is another acknowledgement of the challenging times that carriers face in this low interest rate environment. Northwestern Mutual is considered by many to be one of the gold standard carriers in the industry. Their AM Best A++ rating, reaffirmed in May 2016, is the highest that can be obtained and reflects the company’s “favorable level of risk-adjusted capitalization” and “earnings diversification…along with a relatively stable investment yield when benchmarked against other ordinary life companies.” A.M. Best also noted the company’s “inherent pricing flexibility to adjust dividend scales prospectively to recognize current investment experience” as a reason for its excellent rating. (1.)

With this notice, it appears that Northwestern Mutual is simply adapting to the current world we live in. According to Northwestern Mutual‘s chief investment officer, the low interest rate environment resulted in the company generating $6 billion less in income than it would have in a normal interest rate environment. Total dividends paid on all products will actually drop to $5.2 billion in 2017, from the $5.6 billion paid in 2016. In response, the company has embarked on cost cutting measures that would pare 100 jobs by the end of 2016, with hundreds more to come in 2017. (2.)

In the notice about the changes on their inforce policies, the carrier suggested that all illustrations showing the current (lower) dividend scale/crediting rate should also be accompanied by a second illustration showing the outcome assuming an “alternate rate of at least 100 basis points below the current rate.” This is the sign of a company that is proactively providing information to help its agents and policy owners monitor policies. Let’s hope it is not a sign of further rate decreases and/or expense increases to come.

At ITM TwentyFirst, we manage close to 2,000 Northwestern Mutual policies and will be monitoring the effect of these changes for policy owners.

 

  1. AM Best Affirms Northwestern Mutual ‘s A++ Rating; Highlights Solid Performance, PRNewswire, May 11, 2016
  2. Northwestern Mutual to pay $5.2B in dividends in 2017, Milwaukee Business Journal, October 26, 2016

 

Cost of Insurance Finger Pointing: Who Is To Blame?

The cost of insurance (COI) increases of the last 18 months have wrecked estate plans and created financial hardship among policy owners. The negative effect is clear – some policy carrying costs have more than doubled (see:Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees).  What is not so clear – who is to blame?

No less than five lawsuits alleging foul play are currently filed against life insurance carriers.  AXA, which increased costs on 1,700 specified Athena II policies (see: Lawsuit Filed Against AXA for Athena Life II Cost of Insurance Increase) is accused of subjecting policy owners to “an unlawful and excessive cost of insurance increase,” in a lawsuit filed in February of this year. According to the suit, while AXA insisted “affected insureds are dying sooner than … anticipated .… mortality trends for the affected insureds have continued to improve substantially since the time the policies were issued” (1).

Transamerica, in a suit spearheaded by Consumer Watchdog, is accused of an “unconscionable business practice” that is hurting “elderly Policyholders who have dutifully paid premiums for 20 years or more” (2).  A number of articles in The Wall Street Journal and The New York Times have highlighted the hardship of higher costs, especially for older policy owners.  The suit accused Transamerica of breaching the contract terms “in order to avoid its obligation to credit the guaranteed interest rates under the policies.”  Since the carrier’s investment returns are insufficient to support the policies’ guaranteed 5.5% rate, the suit says “they are attempting to offset the guarantee through higher monthly deductions taken from the policyholders’ accumulation accounts.”

Transamerica is also receiving unwanted attention for its use of so called “shadow insurance,” a practice that moves liabilities from regulated companies that market life insurance to shadow reinsurers, which tend to be less regulated, creating “unrated off-balance-sheet entities within the same insurance group” (3). The practice was noted in the Consumer Watchdog suit and linked to both dividend upstreaming and the COI increases.  That suit notes that in 2010, “Transamerica reported that it had taken reserve credits as a result of reinsurance transactions with affiliated reinsurance companies totaling approximately $30 billion, based on representations that Transamerica had made ample provision to cover the liabilities relating to those policies, including the future COI associated with its universal life policies.”  During that same year they “up-streamed dividends to their ultimate parent holding company, AEGON NV, totaling $2.3 billion.”  The suit infers that the practice left the carrier financially vulnerable and led to the cost increases.

Joseph Belth, professor emeritus of insurance at Indiana University and a well-known industry icon, calls shadow insurance a “shell game” and warns the “industry is headed for serious trouble” (4).  He has brought suit against the state of Iowa to release information on the practice and also tied it into the COI increase, alleging that it “left a hole in Transamerica finances, resulting in its call for substantial life insurance premium increases” (5).

As a response, the carriers have pushed back. An AXA representative declared that the lawsuit against AXA “had no merit.” It is their belief that in their “effort to prudently manage” their policies, a “change was necessary because they expected future mortality and investment experience to be far less favorable than anticipated” (6).

There is no doubt that carrier investment experience has been hampered by the historically low interest environment which has affected their decisions. Most insurance carrier investments are centered on fixed investments, and part of their profits depend on the spread between what they earn and what they credit to the policies. Since the market correction of 2007-08, fixed rates have been squashed by central banks and governments worldwide. As an outcome, the investment spreads the carriers expect have shrunk, and in some cases, disappeared.  Perhaps that is another place to affix blame. While many believe that the low rates were necessary to guide the world economy to safer ground, there is an increasing call for a return to more normal rates, whatever that might be. An increase in interest rates would certainly be more beneficial to insurance companies, but not governments.  As we have noted (see: Low Interest Rate Winners and Losers), it was recently reported that between 2007 and 2012, “governments in the United States, the United Kingdom, and the Eurozone had collectively benefited by $1.6 trillion” because of low borrowing rates.  With 35% of all government borrowing at negative interest rates (7), and borrowing increasing yearly, there is little government incentive to increase rates. In the US, government debt as a percentage of gross domestic product has doubled in the last 9 years, yet net payments on the debt have declined. Without an increase in fixed rates, the stress on carriers will only grow. In the US and in Europe, increasing regulation and reserve requirements have placed additional pressure on the carriers while the governments are assisting in maintaining, what many economists believe, artificially low rates.

While the finger pointing has focused on the carriers and those who have kept interest rates low, we expect that the sights will soon turn to those who manage the policies: the Trust Owned Life Insurance (TOLI) trustees who may or may not have adequately informed grantors, and beneficiaries.  Life insurance is an asset affected dramatically by market changes and must be managed with those forces in mind.

Regardless of who or what is responsible for the increased cost of insurance charges, the impact on many policy owners has been severe. We see many policy owners and trustees looking for advice on what to do with policies impacted by the increases. In some cases, parties have determined they no longer want the insurance.  On November 1st we will be providing a free webinar entitled, What To Do With An Unwanted Life Insurance Policy. The session will provide one hour of free CE for CFP, CTFA and FIRMA members and will features real life case studies, including one centered around an actual cost of insurance increase case we reviewed.  To register for the course, simply click here.https://www.itm21st.com/Education

 

  1. Brach Family Foundation v. AXA Equitable, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)
  2. Feller et al v. Transamerica Life Insurance Company, United States District Court, Central District of California (Case 2:16-cv-01378)
  3. Minneapolis Fed Research, Shadow Insurance, Staff Report 505, Revised May 2016.
  4. Iowa in Middle of Debate Over ‘Shadow Insurance’ Deals, Insurance Journal, August 31, 2016.
  5. Joseph M Belth v. Iowa Insurance Division, filed September 2, 2016.
  6. Courts Divided Over Rising Insurance Costs, insurancenews.net, March 14, 2016
  7. Citi Research, https://pbs.twimg.com/media/CmqmeIbW8AIHgA7.jpg

Low Interest Rate Winners and Losers

In the past year or so, we have highlighted the issues around the historic low interest rate environment, specifically the negative effect on insurance carriers and products. Since life insurance policy management is our focus here at ITM TwentyFirst, these issues are natural for us to cover.
Clearly, many life insurance policyholders are suffering due to the fallout from these low rates. So much so that I get emails every week from average consumers who have run across our blogs, and are looking for answers. So, who else is suffering and who is benefitting?
In our last Blog (See: Why Brexit Is Bad For Your Life Insurance Policy), we briefly discussed the reasoning, but today we will go a little deeper.
The easy answer – those who borrow, win; those who lend, lose.  The biggest winners were governments and non-financial corporations – the biggest borrowers.  According to the McKinsey and Company report cited in our last blog, between 2007 and 2012, “governments in the United States, the United Kingdom, and the Eurozone had collectively benefited by $1.6 trillion, through both reduced debt service costs and increased profits remitted from central banks….Non-financial corporations across these countries benefited by $710 billion through lower debt service costs.” (1)
For every winner there must be a loser, and besides life insurance carriers and pension funds, the greatest loser was the average family.  The report notes “households in these countries together lost $630 billion in net interest income, with variations in the impact among demographic groups.”  Families headed by individuals under age 55 benefitted slightly as they tended to be net debtors, but those who are older, tended to suffer.   On January 3, 2007, the average rate for a 5-year CD in the US was 4.07%.  However, on January 3, 2016, the rate was .86%. (2) For a retiree with $250,000 invested, interest income went from $10,175 to $2,150 – a large decrease.
Interestingly, the report concludes that the low interest rates may not have helped stock market investors, as “the impact of QE and ultra-low interest rates does not point conclusively to an increase in equity prices.”  The report notes that the stock market rally since 2009 may just be “a recovery following a large overcorrection in equity prices…markets tend to overreact as an economy enters a recession, causing a steep decline in prices. After such a decline, it is quite usual for markets to climb back fairly quickly.”
Housing prices were also not affected “in a direct way,” according to the report, though it “may well have prevented an even steeper decline in prices, and they may have accelerated recovery in the housing market.”
The effect of low interest rates may have shifted the political debate on public debt in America.  An article in the Wall Street Journal (WSJ) this week notes that in 2012, when the “election turned largely on how Washington would end a series of rolling budget crises,” the Democratic platform mentioned cutting the deficit seven times.  The platform for this year’s convention never mentions the subject. (3)  And the Republican platform mentioned the term deficit only three times; twice in reference to trade deficits, once in reference to a Balanced Budget Amendment. (4)  The possible reason?  The article notes that while “the national debt as a share of gross domestic product has more than doubled since 2007, to around 75%…net interest payments on the debt have actually declined.”
As mentioned, the low rates are helpful to governments, allowing those who are cash strapped to “reduce their deficits and potentially ease austerity measures”, according to a recent Wall Street Journal article (5).  Spain just sold a bond with a negative rate, a first for them, but Germany, Japan and Switzerland, Sweden, Italy and the Netherlands have all issued debt with negative yields.  In fact, the latest tally shows that 35 percent of all government debt among major countries is trading at negative interest rates. (6)
A well-known economist, currently a professor at Harvard and a former head of the Congressional Budge Office, recently said, “persistently low rates mean the desirable level of debt a country can maintain can be higher.” (7)  Apparently, since high debt has not resulted in increased rates to date, the belief is it will not, at least in the near future.  Some believe that the bigger deficits, if spent wisely, are actually beneficial to the economy.
With increasing government debt worldwide, there is little incentive for central banks and governments to attempt to raise interest rates.  For those of us managing an asset that could use a little relief from these historic low rates, that relief may come later than anticipated.
  1. QE and ultra-low interest rates: Distributional effects and risks, McKinsey and Company
  2. http://www.bankrate.com/finance/cd-rates-history-0112.aspx
  3. Debate Over US Debt Changes Tone, WSJ, July 24, 2016
  4. Republican Platform 2016, https://www.gop.com/the-2016-republican-party-platform/
  5. The Morning Ledger: Low Yields a Boon for Strapped Governments, WSJ, July 25, 2016
  6. Citi Research, https://pbs.twimg.com/media/CmqmeIbW8AIHgA7.jpg
  7. Why Ultralow Rates Won’t Be a Government-Debt Cure All, WSJ, July 25, 2016

Why Brexit Is Bad For Your Life Insurance Policy

The historic vote this week on a non-binding referendum to determine whether the United Kingdom should leave or remain in the European Union has made headlines. The 52–48% vote, with a participation rate of almost 72% of the electorate, was in favor of exit by a 4% margin.

The fallout from this decision has been felt around the world, but how will it affect life insurance carriers and your life insurance policies? Unfortunately, the effect will probably be negative. The consensus is that the UK exit from the EU will harm the economy worldwide. The International Monetary Fund (IMF) recently estimated that Brexit could knock up to half a percentage point off the combined output of the world’s advanced economies by 2019. (1.)

The real issue for life insurance carriers is low interest rates, and this additional stress on the world economy means that we will probably not see rates rising any time soon. In fact, this week Fortune magazine reported that with the Brexit result, the chance of the Fed’s raising interest rates in the US “has collapsed to 0%.” Wall Street traders are “assigning a 10% probability to the Fed cutting interest rates at its July meeting and a more than 20% chance of a rate cut at subsequent meetings later this year and in early 2017.” (2.) This is not good news for life insurance carriers already struggling under the weight of historically low interest rates.

In the last year, we have reported often on the effects of low interest rates on policy performance. A quick review of past blogs will also provide a wealth of information on the Cost of Insurance (COI) increases we have weathered, which many believe was a direct result of depressed rates. Life insurance carriers invest the bulk of their Whole Life and Current Assumption Universal Life premiums in fixed investments. Even Equity Index Universal Life policies, the industry’s new darling, are invested in fixed investments. The credited returns to those policies are driven by options on an index purchased from the proceeds of that fixed investment. As long as interest rates remain at historic lows, there will be a drag on policy performance and financial pressures on the carriers.

McKinsey and Company published a report in November of 2013 detailing the effects of low interest rates on the economy from 2007 to 2012. They found that the biggest winners were governments and non-financial corporations. The biggest losers? Pension and other qualified plans and guaranteed and variable rate life insurance policies. In fact, the report noted, “Life-insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates, so much so that if this environment were to continue many of these insurers would find their survival threatened.” (3.)

That report was published almost three years ago, and things have not gotten better; they have gotten worse. Without positive changes in the current environment, I wonder what a report three years from now will find.

(1.) International Monetary Fund, IMF Country Report No. 16/169, June 2016
(2.) Fortune, The Fed is Now More Likely to Cut Interest Rates Than Raise Them, June 26, 2016
(3.) McKinsey Global Institute, QE and Ultra-Low Interest Rates: Distributional Effects and Risks, November 2013