THE EFFECTS OF NEGATIVE INTEREST RATES ON THE LIFE INSURANCE FINANCIALS

Michael R. Santos
John C. Urbanski
Sonoma State University, Rohnert Park, California

Vincent Richman
Sonoma State University, Rohnert Park, California
Dalhousie University, Halifax, Canada

ABSTRACT

Extremely low or negative interest yields of fixed-income securities present significant hazards for life insurance firms. To address stringent regulations, life insurance firms invest a significant proportion of the security premiums in interest-bearing long-term debt instruments. The authors of this study discuss the adverse effects of negative interest rates for a hypothetical insurance firm and provide calculations to show how the premiums on life insurance products and policy reserves may be changed to mitigate the effects of negative interest rates.

Keywords: Negative interest rates, life insurance, policy reserves, fixed-income securities