Interest Rate Guarantees

  • Many insurance products offer minimum interest rate guarantees for the life of the contract.
    • In fact, some of these guarantees are mandated by statutory nonforfeiture laws.
  • Although guarantees of 3-5% were once considered minimus, the current low interest rate environment renders them problematic.
  • This session will explore the product design,pricing and investment risk-management strategies to mitigate this risk.

1994 - SOA - Long-Term Minimum Interest Rate Guarantees, Society of Actuaries - 18p

However, while we favor SAFE, we are concerned with that 5 percent guarantee. We feel there should be a reasonable range of 3 to 5 percent.

  • If the basis for the guarantee is 5 percent, insurers will need to make long-term investments that have yields higher than 5 percent in today’s very low interest rate environment.
  • If interest rates drop further, 5 percent causes financial difficulties.
  • The trend is down and 5 percent could put insurers at long-term risk.
  • We are conservative investors—investing mainly in high-quality bonds and mortgages. The interest earned on the investments is competitive.
  • Therefore, to guarantee an interest rate for the long term of 5 percent—when long-term rates are currently hovering at less than 6 percent and where they could decrease to less than 5 percent, raises serious concerns.
  • If rates are declining, this may tempt insurers to take more credit risks.  (p43-44)

--  Statement of Ron E. Merolli, Director, Pension Legislative and Technical Services, National Life Insurance Co., Montpelier, Vermont; On Behalf of American Council of Life Insurance (ACLI)

1998 0310 - GOV (House) - Oversight of Pension Issues - [PDF-109p]