Because an annuity is a contractual promise, the attractiveness of any annuity contract is in direct proportion to the financial strength of the company standing behind it. And because annuities are such long-term obligations, consumers and regulators are very concerned about the financial stability of insurance and financial services companies.
Low interest rates can negatively affect fixed annuity payouts. Annuities with benefits tied to future interest rates will generate lower income amounts in a low-interest rate environment. The negative financial impact of low interest rates, coupled with substantial declines in equity valuations after a bear market in 2000, continue plaguing the recovery of insurers' balance sheets.
That kind of uncertainty can have a dramatic effect on annuity sales. Insurers must be able to prove to state regulators that company reserves will be adequate when needed, otherwise poor investment performance can restrict the amount of annuities an insurer will sell.
In 2002, for example, the low-interest rate environment and equity market declines, lead to investment income generated by some 87 companies to be insufficient to fund their annuity reserves, according to Weiss Ratings, Inc., which added that those companies were forced to reallocate investment income from other product lines, dig into capital, or take from operating profits to meet their reserve requirements, a practice which could ultimately threaten the companies' ability to meet their annuity contract obligations.
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