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U.S. Treasury: Low Interest Rate a Challenge for Insurers

Source: Agence France-Presse

Posted on 13 Jun 2013 by Neilson

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low interest rates and insurersSustained low interest rates by the US Federal Reserve could affect the profitability of the American insurance sector, a report by the US Treasury Department said Wednesday.

In 2012, as it continued to crawl out from the financial crisis, the life and health insurance sector posted a record net premiums of $645 billion, and property-casualty insurance firms counted $460 billion in new premiums, according to the report.

Despite weak interest rates that hurt investment returns and catastrophe losses hitting $43 billion, the life sector reported net income of $40.9 billion last year compared with $14.4 billion in 2011, and net gains by casualty firms rose to $37.3 billion from $20.1 billion.

These gains though could be hurt by the extension of the Fed's ultra-low rate policy, or, on the other hand, by a sudden and sharp rate increase, the Treasury report said.

To spur the economy, the Fed has held its principal rate at 0-0.25 percent since the end of 2008, and through its quantitative-easing program has maintained downward pressure on longer term rates.

"The prospect of continued low interest rates for a prolonged period poses a challenge to insurers seeking to balance investment risks and returns," the report said.

Eventually the Fed will have to increase its rates, and that, too, poses risks for insurers.

"While insurers would benefit from an increase in interest rates through improved investment returns, a sudden, significant rate increase could present threats," the report said.

A sudden rise would increase unrealized losses in insurers' fixed-income investments, for one.

At the same time, it could encourage policyholders to look for higher yields elsewhere, which could hurt the insurers' premiums and force them to liquidate investments to make payouts to departing policyholders.

Wednesday's report is the first of its kind by the Federal Insurance Office, which was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law in 2010 in the wake of the US financial meltdown.

The report said that, according to preliminary estimates, 2012 should be the third-largest year in terms of catastrophe losses incurred. Losses could total $43 billion, due in large part to natural disasters like Hurricane Sandy.