The Economy - Insurance

The general account life insurance products of whole life and uni­versal life are interest rate-driven products. The managers of the general account try to manage that account to obtain the best re­turn possible using interest-bearing investments. The life insur­ance industry existed for almost 150 years within a very stable economy. For example, the prime rate from 1930 to 1969 ranged between 1.5 and 8.5 percent, averaging 3.62 percent in a relatively predictable economic environment. The life insurance industry had an easy time investing the assets in those general accounts for this extended period of time.

In the period from 1970 to 1979, the average prime rate was 9.63 percent, with a range of 5 to 15.5 percent. In a 60-day period in May and June 1980, the prime rate went from a low of 12 to a high of 19, a movement of 7 percent. Between 1980 and 1982, the rate not only averaged 17.6 percent, but also experienced unprec­edented volatility, ranging from 11 percent to an all-time high of 21.5 in December 1980. Then came the tumble throughout the 1990s, with long-term interest rates approaching 5.5 percent in the fall of 2000.

Exhibit 1.1 presents a graph illustrating that interest rate trends have been of long duration. Long-term bond rates were in a downtrend for 135 years, from 1799 to 1935. Those rates then moved sideways over 20 years and were in the 2 to 3 percent ranges from 1935 through 1956. Interest rates then started an uptrend that ended 35 years later with the yield on the 30-year Treasury bond at about 15 percent. Since 1981, the cyclical trend of interest rates has been down.

We have no idea whether interest rates will go up, will tend to go back to their 200-year average of 5.5 percent, or will go below that average for an extended period of time. The point is that extended periods of low interest rates have happened, and some economists and analysts are predicting that they will happen again. If this long term, low-interest-rate environment should oc­cur, the rate of return passed through to policy owners holding general account products also will be low.

While interest rates were volatile and hitting unprecedented highs in the 1980s, the stock market was also making dramatic changes. The Dow Jones Industrial Average (DJIA) first rose to 200 in 1928. It then rose to 400 just prior to the crash of 1929 and did not get back to 200 until 1950. It finally hit 400 again in 1954. For 26 years the DJIA volatility was 200 points. The 1000-point level was not breached until November 1972. It took 77 years to get to the first 1000 points on the Dow. But in May 1999, it took only 24 trading days to go from 10,000 to 11,000.

We all have seen that these dramatic economic changes have had an equally dramatic impact on the way the consumer saves and invests. Saving for retirement is not the same for a person born in 1950 as it was for a person born in 1900. Today's retirees cannot manage retirement the same way that their parents did. As the consumer has changed, insurance companies have had to change their products and their approach to the consumer.