"May you live in interesting times” allegedly is an ancient Chinese curse, although the saying appears much more likely to have been the brainchild of a British writer or diplomat sometime early in the past century.

Such a “curse” would condemn its victim to a period marked by chaos and disaster—hardly a pleasant prospect.

But for insurers and others, a more frightening curse may be, “May you live in near-zero-interest-rate times.” Interest income is key to the financial health of insurers, retirees and some other investors. Yet no less an authority than the chairman of the Federal Reserve System—and he is indeed an authority given the power the Fed has over interest rates—has said publicly that near-zero interest rates are likely to extend into 2014.

This assessment comes despite the fact that the economy appears to be improving, at least fitfully. The argument for the long stretch of historically low rates is that the economy still has a long way to go before it will be sturdy enough to withstand the shock of an interest rate increase, significant or otherwise. While no one knows what the economy will look like at the end of 2014—who in February 2006 would have predicted the extent of the financial crisis of 2008?—odds seem to favor continued, if slow, growth.

Of course, another reason for continued very low rates is to allow the U.S. government to borrow at very favorable terms. Given the size of the U.S. debt and the fact that there's no consensus in Washington on how to approach the problem, a jump in rates would increase the government's costs and, ultimately, the tax burden.

The effort to keep the government's costs down through continued low rates of return seem almost certain to increase the cost of insurance. Given last year's catastrophe losses, pressure has been growing to increase rates. Some rates have been going up, albeit gradually rather than sharply, as happened a generation ago during the hard market of the mid-1980s.

Extended low interest rates simply add to that pressure. Insurers will have to demonstrate the discipline to post underwriting profits. Continued rate increases seem nearly inevitable if the economy continues its recovery and underwriters maintain discipline. Throw another high-catastrophe-loss year on top of that, and higher rates will be inevitable.

Risk managers know that they will be responsible for crafting risk management strategies to deal with the market change—after all, that's their job. For them as well, the fallout from insurers coping with low-interest-rate returns may mean interesting times in many ways.

Source: www.businessinsurance.com