Annuities

The year was 1979, the 10-Year Treasury was paying 9.10% and Inflation was 11.35%. That Spring, AC/DC released their sixth studio record, Highway to Hell, which peaked at number 17 on the Billboard 200 Chart. Hidden on the second side was a little ditty called, “If You Want Blood (You Got It)”.

As I write this – nearly forty-one years later – the 10-Year Treasury is paying less than one-tenth what it was, and Inflation is around one-fifth. In my head, all I can hear is Bon Scott belting out that B-Side:

If you want blood, you got it
If you want blood, you got it
Blood on the streets, blood on the rocks
Blood in the gutter, every last drop
You want blood, you got it

The insurance industry is predicated on treasuries and other fixed instruments that are highly correlated to interest rates. In accordance with regulations, most carriers hold anywhere between 60%-85% of their general accounts in these investments. The performance of these investments have a strong impact on the extent a client’s premium dollars can be leveraged into insurance.

Low rates are like recurring cuts to carriers. Even the strongest and most solvent carriers eventually begin to show signs of serious damage. Annuity rates are continually dropping while Life Insurance premiums keep creeping up. These small incremental changes might not be enough though. We are seeing carriers getting “clever” and implementing “Profitability tests” and “premium caps” for larger cases. I won’t be shocked if we start hearing rumblings of mergers, spin-offs, and even de-mutualizations if this persists.

Prolonged depression of interest rates will also force carriers to make tough decisions about inforce business. Raising fees/charges and lowering dividends/interest rates will be expected. Repricing on new products and this will of course lead to new products created by actuarial geniuses that fight to make their product(s) look competitive in an environment with zero return.

There is one other thing that could happen. Carriers could elect to add additional risk into their portfolios. This could pay off in a big way if they realize significant gains, or it could be catastrophic and destroy their solvency.

Whatever happens from here, we are in uncharted waters. While we didn’t want blood, we surely got it. If there was ever a better time to lock a client into a guaranteed product, I cannot think of one.