Interest rate cut impacts insurance industry

The Federal Reserve’s half-point interest rate cut on September 18 will likely have several effects on the insurance industry. These will include higher premiums, bringing more value and competition to life insurance and annuities, and increasing the value of insurers’ investment reserves, according to industry consultants.

However, the rate cut could also increase the pressure for efficiency in insurers’ operations, they added. Lower interest rates may boost insurers’ investments, but it may not be enough for their balance sheets, according to Erik Stockwell, global life and annuities practice leader at Genpact, a consulting firm.

Erik Stockwell, global life and annuities practice leader, Genpact.

“As low interest rates continue, you’ll start to see pressures on premiums,” he said. “You will start to see premium increases because that investment income isn’t necessarily offsetting it.”

Lower interest rates slow down inflation and rising prices, which in turn makes insurance claims less costly, since the cost of replacing items is lower, Stockwell observed. 

Another benefit insurers could see from lower interest rates is an increase in home buying, which in turn means more demand for home insurance, according to Heather Sullivan, managing director, insurance strategy, Accenture.

Heather Sullivan, managing director, insurance strategy, Accenture.

Also, the impact of a rate cut on the economy brings “potential for increased spending and thus increased new business [and] organic growth opportunities, especially in personal lines and small commercial,” Sullivan stated in a written response to questions.

Life insurance and annuities

Bonds of longer duration held by life insurers makes their portfolios more valuable, according to Stockwell. Life insurance has been growing steadily by 1% to 2% each year, he added, and a rate cut means the steady growth will continue.

Jim Quick, partner in the U.S. insurance practice at PwC.

Lower rates add to the market value of annuity investments, according to Jim Quick, a partner in the U.S. insurance practice at PwC. Annuity carriers have been dealing with operational challenges, he added. “There’s been a surge on the annuity side, in workflow, partnership, data interchange and that kind of stuff to basically make it so they can handle larger volumes of assets coming in the door,” Quick said.

Conversely, annuities have been doing well as interest rates were higher, according to Stockwell. “Because of the high interest rates, we saw a lot of sales of annuities,” he said. “There were a lot of regular annuity sales, a lot of fixed annuity sales. We helped a couple of startups in the multi-year guarantee annuity space who are just starting fresh. As this persists, it’ll be interesting to see how annuity sales actually weather the storm.”

Operational efficiency

Insurers with operations that are inefficient will find that gets even more challenging if interest rates drop, according to Stockwell. 

“As the rates are coming down, that element just becomes more and more important,” he said. “A lot of it drove efforts around just standardizing and making sure people were more efficient. The AI component is going to make this a bit different. Companies are investing in AI at scale and really trying to understand how the use cases are going to drive efficiency.”

Also, falling interest rates affect front-end carriers and reinsurers working with MGAs, according to Gabriel Weiss, CEO and co-founder of XN Captive, an insurtech specializing in captive insurance operations.

“Really it’s performance of risk in the overall insurance market,” he said. “Reinsurers are starting to question the risks they take with MGAs. There’s a fundamental misalignment of incentives with MGAs. MGAs are brokers, ultimately. They might be exclusive brokers. They might have a certain underwriting expertise, and they do want their book to perform, hopefully, but ultimately, they are not incentivized in the performance of risk, rather they’re incentivized in premium value, to just make as much commission as possible.”