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Fed rate hike inconsequential, but insurers brace for more

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After the widely expected quarter-point interest rate hike from the Federal Reserve last week, observers are waiting to see how aggressively the Fed moves in 2016.

Some expect the central bank will take a fast track.

“Fed rate hikes next year are likely to be surprisingly rapid, given the declining unemployment rate and rising wages,” Kurt Karl, chief economist for Swiss Re Ltd. in Zurich, said in an email.

A Dec. 9 Reuters poll showed economists forecasting the federal funds rate to be 1.0% to 1.25% by the end of 2016 and 2.25% by the end of 2017, the news agency said after the hike.

How the Fed proceeds will be critical to the insurance sector.

While last week's Federal Funds target rate increase was expected, “how further rate hikes affect credit fundamentals and the longer end of the yield curve is still to be determined,” said Fitch Ratings Inc. said Thursday in a research note.

The initial decision to raise interest rates 0.25%, however, will have limited immediate effect on the insurance sector.

The near-term impact is too “incremental” and uncertain for insurers to begin making pricing changes, according Cliff Gallant, San Francisco-based analyst for Nomura Securities International Inc.

Further, even given the increase, interest rates remain historically low, according to Moody's Investors Service Inc., continuing to vex carriers.

“The low interest rate environment relative to historical levels will continue to pressure insurers' profitability,” Moody's said Thursday in a report.

“The Fed's rate move is a first step that does not bring much immediate relief to long-term investors like insurers, but it is an important step in the right direction,” said Michael Menhart, chief economist, for Munich Reinsurance Co. in Munich.

Sources cautioned against carriers taking any hasty or speculative action.

“If the industry believes they're going to earn more investment income, it will further encourage the already competitive environment we're in,” said Jonathan Hall, chief operating officer for FM Global in Johnston, Rhode Island. “The industry needs to remember that insurance is their business and you need to make a profit on your business, not live off your investment income as a way to be profitable.”