The sensitivity of life insurance firms to interest rate changes

The US is in a period of low interest rates following the Great Recession, which lasted from late 2007 through mid-2009. While a prolonged period of low interest rates is intended to achieve a broad macroeconomic policy objective, individual sectors of the economy may be more or less sensitive to changes in interest rates. Thus, the impact of the policy on these sectors will vary accordingly. This article focuses on the impact of the interest rate environment on the life insurance industry, which is an important part of the US economy and its financial system. Because customers are expected to receive cash from their policies years after they have been issued, life insurers face the challenge of investing the customers' payments in such a way that the funds are available to satisfy policyholders in the distant future. This feature generally leads life insurers to invest in a collection of long-term assets, mostly bonds.