Right now, it is a wonderful time for consumers to borrow. Interest rates have dropped significantly in the wake of the 2008 financial crisis, and they have stayed that way until just recently. The Federal Reserve (Fed) has held these low rates in an attempt to spur economic growth after the downturn, hoping the move would buoy public confidence and consumer borrowing.
And it has worked, as the lending market has grown and people are financing purchases at an ever-increasing rate. But not everyone is excited about the economic boom, as industries whose profits and bottom line are intertwined with the rise and fall of the Fed standards, like risk management and insurance, have been feeling the pinch for years.
Industry analysts say that the cycle of low interest rates is considered a major threat to insurance companies, as capital is tied to rate-sensitive offerings and investments. Insurers’ capital investments in fixed securities have seen their return margin depressed due to the low-interest-rates environment, and only now is the market starting to turn.
Their organizations’ assets and liabilities are exposed to Fed mandated interest rate movements, which can affect every aspect of the business including earnings, capital, reserves, liquidity and market position. Essentially, an insurers' profits are gained from the monetary difference between their investment returns and what they pay out on claims and other offerings. The problem occurs when insurers and risk manager’s gains margin is met by their obligation to policyholders, causing profits and their bottom line to suffer.
But after years of low rates that attempted to boost the economy and consumer borrowing, the market is now turning, causing a sense of relief among the insurance industry.
“The Federal Reserve recently raised the federal funds rate 0.25% and indicated a likelihood of three more rate hikes during 2017,” Insurer Howard Kaye said in his report titled ‘Why Rising Interest Rates Make the Case for Life Insurance Even More Compelling’. “With interest rates expected to continue on an upward trend for the next several years, insurance companies can finally breathe a little easier knowing they can generate some better returns on the premiums they collect.”
While insurers may be able to finally take a breath, they should remember that preparing for the next incident is never complete, even if the skies finally seem clear. The rise and fall of the Fed interest rate shows insurers that their organization craves stability even though the market does not, and the best way to face any coming changes is to make sure an organization is resilient enough to weather the storm.
Business continuity and business continuity management does not only focus on natural disaster and man-made incidents, it can also help a company manage profitability incidents as well. By using a single system of record BCM solution, insurers can more efficiently manage and maintain organizational resilience. If lower interest rates, and the reduced capital from it, are on the horizon, knowing how to manage change is a must. A robust BC software solution can share data, such as HR reductions or claims and call center issues, allowing resilience to remain even though cost reduction measures may have taken place.
By adopting and utilizing BCM best-practices, resilience efforts will have a positive affect on an insurers bottom line. Incidents and claims will be able to be seamlessly managed during an incident, allowing for a prevention of loss when an insurer may need it most. An agile and seamless BCM solution allows companies to effectively manage an incident while hardening itself against change, causing effects of market fluctuations on capital to be minimized. The bottom line is BCM gives the insurance industry a port in a fiscal storm – make sure your organization is ready.
Written by Assurance Software
Assurance Software takes your company’s enterprise-wide business continuity and resiliency program to the next level. With Assurance as your go-to partner for continuity and resilience, you can confidently mitigate risk, manage recovery, and safeguard your employees, customers, operations and brands.