Retirement Income Journal
The information forum of the decumulation industry.

Low interest rates could cost large U.S. life insurers an average of 51 basis points in investment income over the next three years, or about 10% of their average income yield in 2010, according to a new study by Ernst & Young. 

The study, “The impact of prolonged low interest rates on the insurance industry,” was written by Doug French, Richard De Haan, Robb Luck and Justin Mosbo and released in October.  It was based on an analysis of the top 25 life and top 25 property/casualty insurers.   

Though substantial, the projected decline was less than the 68 bps drop in yield that E&Y estimated life insurers suffered since the financial crisis. “As we go to press [in October],” the report said, “the market turmoil has pushed the 10-year rate down to a new record low of 1.72%, compared with an average of 2.70% in August 2010 and 3.59% in August 2009.”

“A 10% decline in yield is significant, and it goes right to the bottom line,” said French, a managing principal in Insurance and Actuarial Advisor Services at E&Y. Even if insurers try to maintain profit margins by raising prices and reducing benefits more or less in unison, they will still face the headwind of a weak economy. “It’s hard to raise prices to the end-consumer when you have a 9.1% unemployment rate,” he said.