Insurers Find It Hard to Guarantee 3% Return
NOT LONG AGO, investors would scoff at an investment that promised only a 3% return, even a guaranteed one. These days, plenty of investors would be happy to settle for that.</br></br>And therein lies a problem for the insurance industry. With record-low interest rates and slumping stock prices, insurers say it's getting hard to provide the minimum guaranteed return on fixed annuities, which is set by law in many states at 3%. Every drop in interest rates, such as November's half-point cut by the Federal Reserve, makes fixed annuities even more attractive to customers -- sales were up 56% in the third quarter to $30 billion -- and more difficult for insurers to finance.</br></br>"What the latest rate cut shows is that the low interest-rate environment we were in a year ago continues, and is more and more problematic," says Bruce Ferguson, vice president of state relations for the American Council of Life Insurers, the insurance industry's trade group.</br></br>To solve the problem at least temporarily, the insurance industry has an answer: Lower the 3% minimum guarantee on new policies to 1.5%.</br></br>Sounds simple enough, but because fixed annuities are insurance products regulated by states, insurers can't just cut the return across the board. Rather, they must go from state to state seeking permission from regulators, and then try to get state legislatures to pass a new minimum. (Even then, any changes would apply only in the states that passed such a change.)