The Federal Insurance Office released its first annual report on June 12, 2013. While most of the report laid the groundwork for FIOs operations and outlined its many responsibilities, the section meant to relay the industry's current issues and emerging trends to President Obama gives insurers a chance to see the regulator's take on topics relevant to everyone in the industry. The following are the main takeaways from the section.
1. Impact of Low Interest Rates
The sustained low interest environment is described, particularly its effects on life and health insurers and the means available to offset those effects. Among these, the report noted the temptation for life insurers to "reach for yield" with their investments and offer products with much more tenuous risk management. Other options for adapting to the ongoing low interest rates, included subject to regulatory and competitive limitations increasing premiums and fees, or changing the terms of minimum guaranty provisions in life and annuity products, as well as turning to derivatives to hedge interest rate risk. However, the report notes, the costs of hedging "may offset much of the expected returns and subject life/health insurers to counterparty credit risks."