How Interest Rates Impact Insurers

Last week the Federal Reserve System made an announcement on quantitative easing, or QE3 in an effort to add stimulus to the economy.  These efforts were directed at keeping longer term interest rates down in order to help homeowners.  In addition, the Federal Reserve announced their intent to keep short term interest rates at “exceptional low levels” until the middle of 2015.   How do low interest rates impact insurers and how can they influence your rates on vehicle insurance?

Why Cash Influences Insurance Companies

An important element of an insurers business relates to cash management.  When we pay our auto polices a good portion of the cash acts as a reserve to settle future claims.  The ability of an insurer to invest this cash and receive returns will play a significant part in how profitable the insurance company is.  As the yield curve tightens insurers are faced with tougher decisions on the best ways to manage their cash.  They can try and take on more risk or extend out on the yield curve to get a greater return, or they can focus on preserving principal and accept the lower interest rates.  Most insurers will operate with a conservative strategy to make sure their capital is protected.  With the announcement by the Federal Reserve last week signifies that insurers will need to deal with the challenge for a longer period of time.  How can this impact what your premiums are on auto insurance?

How Low Interest Rates May Impact Insurance Prices

With lower returns insurers will need to look at all avenues to retain and improve profitability levels to appease shareholders.  One approach is to take on more risk by investing in lower grade investments, which will also increase capital risk.  Another possibility is insurers will look to extend margins and profitability from existing customers.  This could come in the form of higher rates or stagnant rates for car owners who should see their insurance cost drop.  It is not always as transparent as which insurers will get more aggressive with their margins and which will uphold competitive pricing.  The easiest way to keep your insurer honest is by frequently getting quotes from other insurers.

How Can I Benefit From Low Interest Rates?

With interest rates expected to be low for an extended period there are ways a car owner should look to benefit.  Since the cash we hold will be receiving minimal returns it will make sense to pay premiums for a longer period of time.  Auto insurers will offer discounts if you pay your 6 or 12 month premiums up front.  For those on a tighter budget it will help to review low down payment options in order to limit fees you will see on installment payments.

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