There are several ways in which a low interest rate environment can affect the reserving situation of an insurance company. Normally, with stable interest rates and stable market conditions, it is good decision if the annuity fund management team with the insurance company makes diverse investments to ensure that future payments on the annuities will be equal to or less than present incomes from the funds. In a high interest rate environment with booming markets, the investments made by the managers can be expected to give high returns, therefore, portfolios may become less diversified and the annuity sellers can be tempted to raise the limits on annuity sales because of high expected returns.
In a low interest rate situation with slow or bullish markets, the high flying investors quickly reduce their risk bearing investments for safer option, such as government bonds, and would likely reduce their limits on annuity sales as well to keep them in line with the reserves maintained by the company. Generally, the guidelines given by company executive or supervisory boards are to make sure that the investments of the company stay close to the normal procedure of maintaining the present income of the company from various investments made with annuity funds is not less than the future liabilities which it will face in paying back those annuities.
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Quiz 10
1. In order for an insurance company to sell annuities, it must to have a certain amount of money and assets in hand which are called: (Lesson 10: Annuity Reserves)
A. Emergency funds.
B. Investment basis.
C. Collaterals.
D. Reserves.
2. The main use of reserves maintained by the insurance provider is: (Lesson 10:
Annuity Reserves)
A. Create investment opportunities for fund managers.
B. Balance the liabilities of the insurance company.
C. Make loans available to the insurance fund when needed.
D. Make loans available to the clients.
3. The base of an annuity contract is: (Lesson 10: Annuity Reserves) A. Accumulation of premiums over time.
B. All other insurance policies held by the client.
C. Promise of future payments to the client.
D. Death of the annuity holder.
4. Compared to reserve requirements for life insurance policies, annuity reserve requirements are: (Lesson 10: Life Insurance and Annuities)
A. Less stringent.
B. More stringent.
C. Nonexistent.
D. More or less the same.
5. Which of the following would be the best method for a company to not overstep its annuity reserve limits? (Lesson 10: Annuity Reserves)
A. Limit the annuity payments
B. Reduce life insurance agent workload
C. Limit the number of annuities agents can sell
D. Use the 1035 exchange process to convert current annuities into life insurance policies
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6. A company maintaining annuity reserves that are much higher than the minimum required is likely to be seen as ________ company by investors and ratings providers. (Lesson 10: Impact on customers)
A. A small B. A stable C. An unstable D. A risk-taking
7. With stable interest rates and stable markets, annuity funds are usually invested in: (Lesson 10: Annuity Reserves)
A. Foreign Exchange Markets.
B. Commodities Markets.
C. Diversified Stocks.
D. Tech Stocks.
8. The ultimate goal of annuity fund investments made by an insurance company is to ensure that: (Lesson 10: Annuity Reserves)
A. Future payments will be equal to or less than present incomes.
B. Future incomes shall be more than present payments.
C. Present incomes shall be less than future payments.
D. Present payments shall be equal to or less than future incomes.
9. With high interest rates and booming markets, annuity funds are usually invested in: (Lesson 10: Annuity Reserves)
A. Foreign Exchange markets.
B. Growth oriented stocks.
C. Government bonds.
D. CDs.
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10. In a low interest rate situation with slow or bullish markets, annuity reserve fund managers are likely to: (Lesson 10: Annuity Reserves)
I. Place limits on annuity sales II. Reduce risk bearing investments
III. Recommend investments in government bonds A. I only
B. II & III only C. I & II only D. I, II & III
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Quiz 10 Answers
1. (D) There are several purposes for the insurance provider to maintain reserves for various products. Life insurance contracts can only be issued by an insurance company that has the prerequisite reserves to meet the demands placed by those contracts, and annuities are no different in that respect because they require reserves to be kept by the insurance provider as well.
2. (B) Reserves are used to balance the liabilities of the insurance provider, as well as to identify profits that might be used for taxation by the government.
Reserves are not used for liquidity purposes for the insurance fund or for loans to clients; they are to cover the obligations of all the investment instruments the company has sold.
3. (C) Since life insurance contracts are based on the accumulation of premiums over time, reserving requirements for those are less stringent. Annuities on the other hand, are promises for monies to be paid out in future.
4. (B) Since life insurance contracts are based on the accumulation of premiums over time, reserving requirements for those are less stringent. Annuities on the other hand, are promises for monies to be paid out in future; therefore, they have more stringent reserving requirements. Careful insurance companies will often use mortality tables with longer life expectancies for calculating reserving requirements for annuities.
5. (C) A careful company that is mindful of its reputation and its standing will place limits on the annuities their agents can sell. The company can set a limit on the agents, the areas, or a total company-wide limit on the annuities sold per year. This limit could affect the pricing of the annuity if the market demand for annuities is rising beyond the supply.
6. (B) Stability is a concern when the insurance provider does not have enough funds at the present moment to meet future contracts. Therefore, a company which has higher than required annuity reserves is likely to be seen as a stable company. An insurance provider with the bare minimum of reserves might not attract in investor as a good company to invest with, while an insurance provider who maintains more than adequate reserves can be expected to easily uphold their end of the contract, and the customer may more likely to invest with them.
7. (C) In times of stable interest rates and market conditions, management teams of the annuity funds with the insurance company may typically choose diverse investments to ensure growth and stability.
8. (A) Annuities deal with future payments on present incomes, and the ultimate goal of an insurance provider is to make sure that future payments on the annuity will be equal to or less than present incomes.
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9. (B) In a high interest rate environment with booming markets, the investments made by the annuity fund managers can be expected to give high returns;
therefore, portfolios may become less diversified and invested heavily into growth oriented stocks.
10. (D) In a low interest rate situation with slow or bullish markets, the annuity reserve fund handlers reduce their risk bearing investments for safer option, e.g., government bonds, and would likely reduce their limits on annuity sales as well to keep them in line with the reserves maintained by the company.
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