Would you bet your life on interest rates? Life insurance companies are making a huge gamble on rates, they are willing to bet their life and yours on the direction of interest rates. Why are life insurance companies suspending new policies? What does this mean for the direction of interest rates? How will this impact mortgages?
What are life insurance companies doing?
U.S. insurers are doing the once unthinkable, turning away business from some Americans who want a life-insurance policy.
The driving force behind the action: a collapse in interest rates tied to the spread of the new coronavirus and more importantly an expectation from insurers that rates won’t rebound significantly anytime soon.
Life insurers earn much of their profit by investing customers’ premiums in bonds until claims come due. In simplest terms, when they price policies, they make assumptions about how much interest income they will earn investing these premiums years into the future. The less they earn, the more they may need to collect in premium or fees to turn a profit.
Why is watching life insurance companies important?
Life insurers make their money on the spread between what they bill the customers and their investment income on high quality safe assets (like bonds and treasuries). With yields falling to historic lows, life insurance companies are signaling by their actions that low yields are here to stay and that yields could likely go even lower.
Remember yields move in inverse to prices so as there is a flight to quality assets like high quality bonds and treasuries, their prices rise. This rise in prices reduces the yield. By forgoing new policies life insures are betting that rates will continue to stay at historic lows and/or fall further.
What about mortgages?
Mortgages are indirectly tied to the 10-year treasury. Mortgages are currently at historic lows. With life insurance companies pulling back on new policies this is a leading indicator that mortgages likely have more to fall. If you were looking for a mortgage today, you might want to look at an adjustable rate as there is a good probability that rates have a bit further to fall.
I’m a big believer in watching how very smart people “act with their wallet”. In this case life insurance companies are forgoing substantial revenue right now in order to avoid losses in the future. I’m certain that they do not take this decision very lightly. The actions of life insurance companies are an important leading indicator of the future of interest rates and mortgage rates.
Regardless of what the fed or anyone else is saying, the market is sending a very clear signal that rates will stay low for a long time and likely have a bit further to fall. Do you believe the market? I do!
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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