February Update: Potential Valuation Interest Rate Changes for Life and Annuities

With over one-half of the next valuation-rate determination window in the books, downward-trending benchmark rates suggest the very real possibility of a 3.5% Life Reserve Rate and a 4.5% Life Nonforfeiture Rate. These rates would be effective for 2013 issues (though the lower Nonforfeiture Rate would not be required until the following year, 2014). This will almost surely require the repricing of life insurance product portfolios or, at minimum, the reduction of dividend rates, where possible.

These benchmarks continue the trend observed during the recently concluded valuation rate determination window, but minimum-change requirements in the rate determination algorithm overrode a decrease (specifically, only 0.5% increments of change are allowed, otherwise the Life Reserve rate for 2012 would have been 3.75%).

As of this writing, the benchmark rate would need to average at least 4.97% -- a rate 50 basis points higher than the recent December, 2011, rate -- over the remaining five months in order to avoid a valuation rate change. We will continue to monitor this trend as the June 30 closing date approaches, and recommend action accordingly.

In addition, there remains the possibility of further reduction to the valuation rates for annuities, effective 2012:

Decrease in the immediate annuity valuation rate -- falling from 5.00% to as low as 4.25%.

Decrease in the valuation rate for most deferred annuities -- a 25 to 75-basis point drop for single and flexible premium products.

The Five-Year CMT rate as of January is 0.84%, meaning that the minimum dynamic annuity crediting rate remains entrenched at 1%; it would require a drastic rise in the underlying benchmark before any potential rise in this guaranteed minimum rate.

Please see our 2012 Valuation Rate profile for more details. A full, downloadable 2011 Valuation Rate profile is is also available, as well as that for 2010.

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