By Allison Bell
If corporate bond rates follow key Federal Reserve System benchmark rates to record low levels, insurers may have to change the rates they use in reserve calculations.
"That is a major change," said William Seyboth, president of the CNA Group Benefits Division. "That one is very scary, if you do it unilaterally."
Seyboth spoke in Chicago at a group insurance conference sponsored by LIMRA International, Windsor, Conn.
Actuaries use discount rate assumptions, or interest rate assumptions, and investment return assumptions when computing reserve requirements for long-term disability insurance policies, defined-benefit pensions plans, and other products that create long-term financial obligations.
The higher the discount rates and average returns assumed, the lower the premiums and reserve requirements have to be, according to insurance experts.
For years, actuaries assumed reserves could earn annual rates of 5% to 10% when invested in high-quality, low-risk corporate bonds.
Crawford & Company, for example, used a discount rate assumption of 7.5% in defined benefit pension plan calculations for 2000.
