Lower Rates for Longer...Again?

Dan Smereck, Managing Director & Principal, Strategic Asset Alliance

The good news is that we can finally have confidence in our interest rate forecasts. The bad news is that we can finally have confidence in our interest rate forecasts. The Fed has said to expect rates to be near zero for the next two to three years. And, Fed Chair Jay Powell’s term doesn’t end for another seven years. With practically every insurer’s book yield greater than their market yield, Mr. Powell has just told you to expect lower investment income. Financial markets are getting more complex every day. With ‘lower rates for longer,’ the markets just became more perilous. How can your insurer or government risk pool develop its own effective playbook in this environment?

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Key Takeaways  |  View PDF

  • Yields are expected to remain low from both the FOMC and market-expectation perspectives, and while things may change, they are expected to remain relatively flat until 2023.
  • While we all wait for the 'Grand Reopening' of the US, there is close to $2T in income ready to be introduced into the economy (in the aggregate), which has a range of potential impacts on inflation.
  • With how low rates are expected to be, it is important for insurers and risk pools to rethink their use of surplus. Even if it is outside of investments, there may be better risk/reward propositions for the organization. This can apply to investment risk, underwriting risk, operation risk and reinsurance risk.
  • Regardless of what's going on in the market, insurers and risk pools have 5 real avenues to rethink/reassess as a means to address yield in their fixed income portfolio: Duration, Credit, Structure, Liquidity and Leverage
  • When facing declining yields, it is important to look across the volatility spectrum to see where yields can be picked up.
  • It's important for insurer and risk pool Board members or executive staff to look at long-term time horizons, as it relates to investment return and volatility, since the long-term outlook is always a priority from an organizational perspective.

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