Producer Connection is Standard Insurance Company's quarterly online newsletter for Employee Benefits producers.
Sign up to receive Producer Connection
what you think of Producer Connection and how we can make it better.
Producer Connection is Standard Insurance Company's quarterly online newsletter for Employee Benefits producers.
Sign up to receive Producer Connection
what you think of Producer Connection and how we can make it better.
In the wake of the subprime mortgage loan and credit crisis, interest rates have dropped to their lowest levels since 2003. That means insurers are experiencing diminished returns when investing the premiums they collect. So what does that mean for LTD insurance pricing? A good general guideline to go by is something we call the 4-to-1 Rule. The rule states that a 1% change in interest rates generally results in a 4% change in LTD rates in the opposite direction. For example, if interest rates drop 1%, LTD rates need to rise 4% to offset the lower investment returns.
Because LTD claims can last months or even years, the reserves that need to be set aside to pay future benefits are sensitive to interest rates. Since reserves make up two-thirds of the cost of an LTD plan, pricing is also sensitive to interest-rate changes.
(Click image to enlarge)
So, does this mean that you can expect all LTD quotes you get from carriers to be higher now than they were a year ago? Not necessarily. Every risk is evaluated on its own merits. If a group has valid experience that warrants a lower rate, you will likely see a lower rate. What it does mean is that the wider trend in the industry, in a low-interest-rate environment, will be toward higher LTD prices.
Remember, it's in your best interests to work with carriers to get the right rate for the risk so that your clients aren't hit with a big increase at renewal — and you're not forced to go out and market the case again a year or two down the road.