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]