Interest Rate

  • Maybe he is not getting all the disclosure he needs, as far as the continuing benefit is concerned, when the interest rates change from that illustrated. 
    • The interest assumption is one that we really struggled with.

--  Gary P. Monnin, Senior Vice President, Chief Actuary of American Founders Life Insurance Company

1982 - SOA - Universal Life (rsa82v8n111), Society of Actuaries - 14p

  • How many actuaries would feel comfortable assuming a 9% interest rate over the next 20 years, if the premium rates were guaranteed?

--  Denise F. Roeder, Occidental

1980 - SOA - Non-Participtring Life Products with Non-Guaranteed Premiums (rsa80v6n32), Society of Actuaries - 22p

  • The interest rate sensitivity of UL policy cash values, amplified by the corresponding cost of insurance sensitivity with declining interest income, suggests UL has always been a simple question of Duration.

201x - AP - Universal Life Insurance Duration Measures -  Lange, Alonzi, Simpkins - 14p 

  • One of the aims of our society is to replace impressions with demonstrations;
    • perhaps replacing conjecture with calculation might be another appropriate phrase.
  • In the case of the interest rate assumption, something along these lines is overdue

1973 - SOA - Choice and Justification of an Interest Rate, by Irwin T. Vanderhoof, Society of Actuaries - 42p

  • Chairman Pete Stark (D-CA):  It would be the Chair's impression that:
    • That historically, at least, as to the interest rates, there was an awful long time when you were operating in a band of 2 to 6 percent, so that it is only since approximately 1965 that you have gotten out of that band of a base of 2 and a ceiling of 6.  (p191)

1983 0510, 0511 and 0728 - GOV (House) - Tax Treatment of Life Insurance, Pete Stark (D-CA)  ---  [BonkNote]

  • Commissioner Wilcox also spoke favorably of a new provision in California where the illustration of non-guaranteed elements must show: the lesser of:
    • the amount being currently paid,
    • the amount the company is currently earning,
    • or the amount the company can expect to earn.

1994-3, NAIC Proceedings

  • One problem area in a lot of policies has been interest rates.
    • A slow cumulative, very large decline in interest rates has affected everything.
  • Why are we getting so many complaints?
    • Did the policyholder expect rates to stay the same forever?
    • Did the agent or the company mislead?
    • Did the policyholder think we were promising?
      • He shouldn't have, I hope he didn't.

--  Bruce E. Booker, Life of Virginia, a member of the American Council of Life Insurance (ACLI) Task Force on Cost Disclosure and the National Association of Insurance Commissioners (NAIC) Advisory Group on Illustrations

1993 - SOA - Sales Illustrations - We Can't Life With Them, But We Can't Live Without Them!, Society of Actuaries - 20p

  • Next, the use of interest rate assumptions in the policy illustrations should not be deemed realistically to have the capacity to mislead prospective policyholders.  
    • That is a too far-out legal fiction.  
  • The probable level of future interest rates is, again, most certainly and most commonly known and appreciated as something not solely within an insurance company's or anyone else's ability to forecast (see, Fischel and Stillman, op. cit., at 14).  
    • Even Alan Greenspan and the Federal Reserve Board hedge their “bets” and just do their best.  
  • Furthermore, any general information defendants had involving market projections was the type of information plaintiffs, indeed anyone, “could reasonably have obtained” (Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, supra, 85 N.Y.2d, at 27, 623 N.Y.S.2d 529, 647 N.E.2d 741), on their own, through financial advisors or via the “internet”.

1999 - LC - Gaidon v Guardian Life Insurance, Decided: December 20, 1999 - [link-findlaw.com]

  • Two years ago, universal life was typically crediting 13% or 14% on a current basis.
  • The conventional wisdom said that a successful Universal Life (UL) company could not succeed in developing and introducing variable life, because the agents would rather sell a 14% sure thing than a stock fund.
    • Well, we did not think that that was true then, and we sure don't think it's true now.

--  Gilbert W. Fitzhugh, Senior Vice President and Actuary at PRUCO Life, stock subsidiary of the Prudential Insurance Company

1986 - SOA - Variable Life/Fixed and Flexible Premium, Society of Actuaries - 38p

  • Projects (1) and (2) correspond to the topic heading "Companies Earning Lower Interest Rates than the Rate Assumed in Their Reserves."

1982-1, NAIC Proc. 

  • In a participating company the guaranteed rate means little because the dividend is the controlling factor.
  • Errors in nonparticipating companies fall on the stockholders.

--  E. M. McConney

1953 - SOA - General - Society of Actuaries - 11p

  • We must understand that we no longer have any reasonable basis for making any assumptions whatever about the range within which interest rates will fluctuate.
    • Financing the squeeze by issuing commercial paper is just about the most dangerous thing a life company can do.

--  Ernest J. Moorhead (Jack) - EJM

1981 01 - SOA - Financial Hazards of the Cash Value Life Insurance Business, by EJM The Actuary, Society of Actuaries - 2p

  • 1988 - SOA - Interest Rate Scenarios, Merlin F. Jetton, Society of Actuaries - 54p
  • 1989 - SOA - Guaranteed Returns - A Tragedy of the Commons!, by Donald R. Sondergeld, Society of Actuaries - 4p
  • 1992 - SOA - A Practical Guide to Interest Rate Generators for C-3 Risk Analysis, by Sarah L. Christiansen, Society of Actuaries - 34p
  • 1994 - SOA - Long-Term Minimum Interest Rate Guarantees, Society of Actuaries - 18p
  • Birny Birnbaum, CEJ ... said the best predictor of future interest rates are current interest rates.

naic.org/meetings1704/cmte_a_2017_spring_nm_materials.pdf - Bad Link

  • As far as interest is concerned, the problem is different.
  • There seems to be a very, very long downward trend in interest rates earned by life insurance companies.
    • This trend is somewhat obscured by a rather long, superimposed cycle of ups and downs.
    • There was a long downswing to a low point about 1900, followed by an upswing to the 1920's and the downswing to the low of 1947.
    • Currently there has been an upswing of 14 years.
    • These swings are roughly 20 years each way, or about forty years for each full cycle, plus or minus.
  • I conclude from this picture, first, that we should not assume that the low portfolio earning rates around 3% in 1947 will not face us again and, second, that at the end of the next long-term downswing the earnings rate may well be somewhat below 3%.
  • Summing up, it seems to me that reasonable assumptions for annual premium policies must recognize the long-term commitments in question, and thus should consist of a realistic current mortality table with projection into future years, together with an interest rate not higher than 3% and preferably somewhat lower.

--  Wilmer A. Jenkins

1961 - SOA - Ordinary Insurance Premiums, Society of Actuaries - 3p

  • A lower rate of interest than the common one is assumed, because the general experience of life insurance companies has been that when this precaution has not been taken the companies eventually find themselves involved in hopeless bankruptcy.
  • All calculations in life insurance are based upon two simple data: the rate of interest on the invested assets of the companies and the average rate of mortality among the insured.  (p6)

1870 - Book - Cost of Insurance: A Treatise Upon the Cost of Life Insurance, Together with an Arithmetical Explanation of the Computation of Premiums and Valuation of Policies to which are Added Tables of Net Premiums, Cost of Insurance for the Use of Life Insurance Agents - by Nathan Willey

LEWIS’ INTEREST-RATE PREDICTIONS

  • The following was stated by Douglas H. Rose in the 1920......
  • “The Spectator Company is in the habit of publishing annually in its Year Book the rate of interest earned on mean invested funds of a limited number of life companies.
  • Going back 40 years, the averages for five-year periods are as follows:

1880–1884 ....... 5.50%
1885–1889 ........ 5.37%
1890–1894 ........ 5.15%
1895–1899 ........ 4.88%
1900–1904 ........ 4.66%
1905–1909 ........ 4.77%
1910–1914 ........ 4.80%
1915–1919 ........ 4.87% [21]

Yields on Moody’s Aaa-rated corporate bonds for the period 1919 (the earliest year for which such a figure was found) through 1997 are shown in Table A.

TABLE A
Corporate Aaa (Moody’s Seasoned Bond Yields 1919 to 1997
(Percent per Annum)

Year Yield Year Yield

1919 5.49
1920 6.12
1921 5.97 1961 4.35
1922 5.10 1962 4.33
1923 5.12 1963 4.26
1924 5.00 1964 4.40
1925 4.88 1965 4.49
1926 4.73 1966 5.13
1927 4.57 1967 5.51
1928 4.55 1968 6.18
1929 4.73 1969 7.03
1930 4.55 1970 8.04
1931 4.58 1971 7.39
1932 5.01 1972 7.21
1933 4.49 1973 7.44
1934 4.00 1974 8.57
1935 3.60 1975 8.83
1936 3.24 1976 8.43
1937 3.26 1977 8.02
1938 3.19 1978 8.73
1939 3.01 1979 9.63
1940 2.84 1980 11.94
1941 2.77 1981 14.17
1942 2.83 1982 13.79
1943 2.73 1983 12.04
1944 2.72 1984 12.71
1945 2.62 1985 11.37
1946 2.53 1986 9.02
1947 2.61 1987 9.38
1948 2.82 1988 9.71
1949 2.66 1989 9.26
1950 2.62 1990 9.32
1951 2.86 1991 8.77
1952 2.96 1992 8.14
1953 3.20 1993 7.22
1954 2.90 1994 7.97
1955 3.06 1995 7.59
1956 3.36 1996 7.37
1957 3.89 1997 7.26
1958 3.79
1959 4.38
1960 4.41

Sources: For years 1919–1970: U.S. Dept. Of Commerce, Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition, Part 2, 1975, 1003, Washington, D.C. For years 1971–1966, U.S. Dept. Of Commerce, Bureau of the Census, Statistical abstract of the United States, various years and pages, Washington, D.C. For 1997, Moody’s Investors Service, Moody’s Bond Record, February 1998, Vol. 65, No. 2, 38.

1998 - SOA - A 99-Year Prospective Test of an Interest-Rate Theory, by Daniel F. Case, Society of Actuaries - 32p