I’ve said it before but it bears repeating: there are two ways to make money in the insurance business. Earnings from investments and the insurance business. Persistent low interest rates means insurance companies earn less in interest. That means that they need to make their profits from increased premiums.
The persistent low interest rates over the last several years along with increased payouts for things like tornado damage (and increasing healthcare costs) has forced insurance companies to raise their premiums or, in some cases, stop writing new business in certain markets. When premiums rise some people drop their coverage.
Most employers with self-insured health plans carry stop-loss coverage to limit their exposure to large claims. Those policies are written by insurance companies and their premiums have been affected as I’ve suggested in the post.
Additionally, when employers use premiums paid by employees in a self-insured health plan as reserves those premiums must be placed in a trust account. Lower interest rates affect the earnings on such accounts.
Insurance is nothing more than an actuarial business based upon risk (liability payouts) financed by premiums and investment returns. I think it was PD who inquired why investment losses would cause premium hikes. Well, there you have it.
Further, as D ave notes, yet another reason the current fed policy is horrible is that it is hosing low beta investors. (combined with false advertising on inflation and practically criminal). Almost every investment advisor is Hereford now involved in yield chase for all but short term cash needs of their clients. Hig yield bonds, over-weighting in dividend producing equities, “alternatives” allocations etc.
That brings up the concept of risk adjusted returns, but I don’t want to go there. The Fed is doing Obama a favor, banks a favor and debtors a favor, but screwing savers.
recent headline:
“Mortgage Applications Drop as Rates Jump”
You can try to raise rates all you want; my bet is you won’t find a lot of borrowers if you do.