Question

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only drew 2%. What interest rate will the insurer pay to its policyholders?

A 2%
B 2.5%
C 3%
D Whatever interest rate the company deems appropriate

Answer 1

The insurer will pay its policyholders the guaranteed minimum interest rate of 2.5%, even if the investments only drew 2% during an economic downswing.

Step-by-step explanation:

If the guaranteed minimum interest rate for an insurance company's general account is set at 2.5%, but the investments only drew 2% during an economic downswing, the company will still pay the policyholders the guaranteed minimum interest rate of 2.5%.

This is because the insurer has promised the policyholders a minimum interest rate and is obligated to fulfill that promise, regardless of the actual investment return.

In the scenario described, an insurance company has set a guaranteed minimum interest rate of 2.5% on the fixed annuity premiums it receives.

Even though the investments underperformed during an economic downswing, yielding only 2%, the insurer is obligated to pay the minimum guaranteed interest rate. This means that the insurer will pay its policyholders a rate of 2.5% as that is the rate that was guaranteed to the policyholders regardless of investment performance.