Market Trends And Product Designs
Considerations when interest rates are rising
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Also co-authored by Stephanie Moench, Christopher Ruscito Lee, and Jeffrey Mu

Part 4 in a series

In the fourth of a series of articles, we assess current market trends for long-duration products—including life insurance, annuities, and long-term care (“LTC”) insurance—following an extended period of low interest rates. We also identify key lessons carriers can learn from historical periods of rising interest rates to better position themselves for long-term competitiveness and profitability.

Key highlights:

In the past 20 years, several cycles of slow-but-steady increases in interest rates have occurred, each following a sharp decline. After the economic downturn from November 2018 to August 2020, interest rates have again been trending up (although the 10-year treasury rate is still well below 2%).

WHERE ARE CARRIERS TODAY WITH HISTORICALLY LOW INTEREST RATES?

The current sustained low interest environment has slowly, but substantially, shifted the long-duration insurance market landscape. It has put pressure on writers to find ways to manage profitability on existing business and carriers have also had to search for innovative products that strike a balance between competitiveness and profitability.

WHAT CAN CARRIERS LEARN FROM PRIOR PERIODS OF RISING INTEREST RATES?

One important lesson that carriers can learn from prior periods of interest rate increases is to focus on product designs that perform well in rising interest rate environments. Based on sales experience from the most recent rising interest rate period (2016 to 2019), shown below, whole life products are generally more stable. Products that have the potential to gain higher returns with other market indices, such as indexed universal life products, also performed well.

Flexible designs have proved critical to the popularity of certain product offerings and can be used to stabilize profitability. Some flexible features that emerged in prior periods of interest rate increases, which could also work in today’s market, are outlined below.

Other lessons highlighted in our article include: (i) be mindful of new money rate implications on portfolio returns and (ii) pay close attention to long-term impact and tail-risk scenarios.

Download our paper to read more.