The 10 Ways The Fed May Cause Major Workers Comp Changes
We could be on the verge of major workers comp changes. The Fed Head Janet Yellen and her Board just increased the Federal Bank lending rate by .25%. This may not be a jolt to the insurance markets – yet. Read the article linked to in the second sentence. Yellen may institute a stealth increase soon.
A scenario follows which may cause a Hardening of the Markets. I warned about this before when China was affecting the world money markets. Now, the money market changes are much closer to home.
- The Fed increases the prime lending rate a few times over the next two years.
- Naturally, the investment and debt interest rates will follow.
- Insurance carriers have been able to support a soft market by making up their lower premiums with outside stock investments – check any insurance carrier’s financial statements.
- Over the last 50+ years, when interest rates look better, people and companies move their funds from stocks to money market accounts.
- Over the same last 50+ years, the numbers show that stocks earn much more than any type of interest bearing account
- Insurance carriers will not be able to earn the same returns, stocks earnings always beat interest bearing accounts
- As mutual funds and investors in general put money on interest, the stock market usually suffers – not a market correction
- The carriers have to make up the prior soft market underwriting losses somewhere – namely premiums
- Due to these major workers comp changes, carriers will become risk averse and stop underwriting certain riskier markets
- The above nine steps are not a crisis of any kind. They represent the start of a Hard Market.
- Bonus thought – as the dollar strengthens (as it has for three months), foreign investments will suffer as bringing funds back into the US will cost much more than in 2016 and previously. Ouch for foreign investments
A friend of mine says that even a broken clock tells the correct time twice a day. He could be correct in this case. The stealth concern is that the US printed money by the basketful.
The interest rate on a large amount of currency – we do have a ton – needs only small interest increases to cause a spike in inflation > Think about Greece in the EU.
Will 1 – 11 above happen? The Fed would have to increase interest rates over the long term each time they meet. Carriers may decide to take it on the nose just to keep business.
Are the conditions right for a hard market? Major workers comp changes may occur if the interest rate spikes.
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