Analyst: Slowly Rising Rates Are Good For Insurers

June 30, 2004 at 08:00 PM

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The Federal Open Market Committee today raised the federal funds target rate 25 basis points, to 1.25%, from 1%.[@@]

Analysts say the change will help the insurance industry.

The U.S. benchmark rate is the overnight rate charged to commercial banks and other depository institutions.

The FOMC, which includes the heads of the Federal Reserve system, said in a statement that "even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity."

"A slow, gradual increase in interest rates would be a positive thing for the industry," says Robert Riegel, managing director-insurance with Moody's Investors Service, New York.

Low rates have hurt insurers in recent years by compressing spreads, or the gaps between the rates insurers pay customers and the rates insurers earn on their own investments. A slow rise in rates would offer relief, and a 200 to 300 basis point rise over the next couple of years would be the best scenario, Riegel says.

If, on the other hand, there were a sudden spike in rates, the spike would reduce the value of companies' existing investments, Riegel says.

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