Although I haven’t seen much written yet on what rising interest rates will do to the insurance industry, the trend has to be a positive – even as other signals stay negative.
Insurers have for some years now fretted about what low interest rates are doing to the returns on their massive investment portfolios. So, it has to be a welcome prospect that the Fed will raise interest rates multiple times this year – Morgan Stanley recently predicted six increases, each of 25 basis points, or hundredths of a percentage point.
The lack of return on the investment portfolios has forced insurers to press harder elsewhere. The area that I hear most cited is underwriting, where firms are imposing discipline to make sure they return a profit as long as they can’t count on investment returns to cover any failings. But insurers have felt pressure to create efficiencies across the board, including in the distribution channel. So, any easing of pressure because of a rise in interest rates should tend to alleviate some of the more drastic actions insurers might be contemplating.
Likely good news for agents and brokers!
At the same time, McKinsey is making ominous noises about how the industry is faring. As summarized in Reinsurance News a recent report from the management consulting firm said that insurance industry profits are “practically at a standstill.”
The report said that premium growth slowed from more than 4% in 2020 to just 1.2% last year and that earnings dropped 15%. More ominously, McKinsey concludes that half of insurers around the world aren’t earning their cost of capital.
So, even if interest-rate pressures diminish, insurers may feel the need to keep pulling every possible lever to become more efficient, including with agents and brokers.
Of course, we’re all still wrestling with the pandemic, and we all may have even bigger worries soon enough, given the Russian decision to invade Ukraine. Here’s hoping the pandemic and geopolitics settle down enough that we can actually focus on limited issues like interest rates and premium growth, rather than having to figure out existential ones.