One of the world's top monetary policy shapers today told insurance regulators that he has mixed feelings about increasing interest rates, and that he's thinking about the life insurers.
Federal Reserve Board Governor Philip Jefferson spoke at a forum session in Washington organized by the National Association of Insurance Commissioners, which was streamed live on the web.
"The insurance industry has performed well through recent stresses," Jefferson said. "For life insurers, the recent increase in interest rates has been a mostly welcome development that has supported higher investment returns but also poses risks, such as early withdrawals by some policyholders.
Although life insurers' capital levels are strong, "the use of reinsurance merits continued monitoring," Jefferson said.
Jefferson has served as a Fed governor for about a year. Last week, President Joe Biden nominated him to be the Fed's vice chair.
What It Means
Fed officials tend to focus heavily on banks and how trends in interest rates affect them. Jefferson has indicated that he has noticed that the companies that back your clients' life insurance policies and annuity contracts exist, and that they have problems of their own.
Philip Jefferson
Jefferson was born in Washington. He has a bachelor's degree from Vassar College and a doctorate in economics from the University of Virginia.
He served as a faculty member at Columbia University and the University of California at Berkeley and as an economist at the Fed before going to work at Swarthmore in 1997.
He became dean of the faculty at Davidson in 2019.
While he worked in academia, his research focused on areas such as the economics of poverty and the relationship between employment and health.
The Fed and Life Insurers
Life insurers ended 2022 with $3.6 trillion invested in bonds, and they also held other fixed-income assets, such as mortgages.
Just how much ability the Federal Reserve Board has to influence interest rates and how changes in interest rates affect the economy are controversial topics.
But the Fed uses adjustments in the interest rates it controls to try to influence the interest rate environment. Many economists believe that increasing interest rates can lower inflation, by limiting buyers' use of borrowed money to pay for goods, services and investments.
When overall interest rates rise, the rates life insurers earn on newly invested money also rise. But rising rates also decrease the current market value of the bonds and mortgages already on life insurers' books.
