(June 14, 2013) – Demand is up for annuity products from US insurance companies, but according to the industry’s federal regulator, this extra business may not be good business in the long term.
“Recent efforts by life and health insurers to develop products to meet increased demand and to fund longer payout periods for annuities might entail additional financial stability risks,” the latest report from the US Treasury’ s Federal Insurance Office said.
There are two macro factors working against insurance companies as they fulfill demand for lifetime income products: demographics and interest rates. The aging population has driven up demand for annuities; extended life expectancies have made them more expensive.
The second factor, ultra-low interest rates, means insurers are profiting less from their investments.
“The low interest environment constrains the ability of insurers to generate sufficient rates of return on investment portfolios,” the report said. “Additional risks resulting from the low interest rate environment include increased market exposure associated with the minimum guaranty provisions included in variable life and variable annuity products.”
Companies still hold the vast majority of their general account assets in fixed income, according to the regulator. In 2012, bonds accounted for 75% of life and health insurance sector assets, amounting to more than $2.5 trillion in fixed income.
The report attributed the bullish market for annuity products in part to the low rate environment. But, it also cautioned that the same factor that is driving up demand may hinder insurers in meeting their obligations over the long term.
Read the full report here.