Fed Alternative to LIBOR Benefits Insurers, Consumers

Fairness compass

Do you remember how global banks manipulated the London interbank offered rate (LIBOR) — an international benchmark interest rate — during the 2007-09 financial crisis?

If that doesn’t ring a bell, don’t worry. Plenty of insurance industry advocates remember it well.

Life insurers hedge interest rate risks on their investments in certain bonds that reference LIBOR. These hedging instruments help protect the value of life insurers’ investments from the effects of interest rate fluctuation. This process enables insurers to better manage financial risks, which helps them provide consumers with long-term financial protection products.

However, because of the instability caused by the manipulation of LIBOR, life insurers faced unnecessary burdens in utilizing hedging instruments. That’s why we’ve been following closely the efforts by the New York Federal Reserve Bank to develop an alternative to LIBOR called the Secured Overnight Financing Rate (SOFR).

The life insurance industry is very supportive of SOFR, which will be based on the cost of borrowing overnight using U.S. government debt.

Compared with other financial institutions, the transition to SOFR is even more impactful for life insurers. To support life insurers’ long-term commitments to our policyholders, our investments typically have longer duration than other financial institutions. We have legacy contracts that are currently tied to LIBOR. For those arrangements, state insurance departments will coordinate to implement the switch to SOFR.

With the transition to SOFR, life insurers will experience a more reliable and fair system. This process will replace LIBOR’s instability with trustworthy financial benchmarks.

Americans are living longer and financial security through retirement is a big challenge for many. Our guaranteed products — their availability, accessibility, and affordability — help people live and retire with financial peace of mind.

Thanks to SOFR, life insurers will have better tools enabling them to continue to offer financial protection products for all Americans.

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Carl Wilkerson

Carl Wilkerson

Carl B. Wilkerson was Vice President and Chief Counsel, Securities at the American Council of Life Insurers until March 2020. He principally addressed financial service institution regulation that had an impact on life insurance companies. Prior to joining ACLI in 1981, he was a staff attorney at the Securities and Exchange Commission.