Tuesday, March 16, 2021

Cryptocurrency outlook #5

Bitcoin MagazineThe Insurance Industry And Bitcoin

The article pertains to and refers to life insurance companies. It doesn't mention other kinds of insurance products, such as auto, homeowners, commercial property, and health, and therefore doesn't apply to them or much less so. The magnitude of interest rates affects the pricing of life insurance and annuities more so than the other products because the former are longer-term and without the ability of the insurer to adjust premiums after the contract is issued.

The following numbers illustrate the effect of interest rates on (pure) premiums for whole life insurance.  Here "pure" means they don't include non-mortality expenses or the probability of policy termination. (The premium amount buyers pay include these things.) For an issue age 40 or less the annual premium with the interest rate = 0.05% is more than 2x the annual premium with the interest rate = 5.0%. The ratio declines above age 40, but at age 60 is still about 1.4x times that for 0.5% interest than for 5.0% interest. For annuities the effect of lower interest rates on premiums is even more.

While such pure premiums are not what buyers pay, they are used in calculating reserves -- as required by statutory insurance laws -- for a life insurance company's in-force policies. Such reserves appear on the liability side of an insurer's balance sheet and thus have a real effect.

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