The Fed can afford to be patient and take a wait-and-see attitude as they assess employment conditions, GDP levels, inflation figures, and international developments. If the economy should heat up more quickly than expected, they could always gently step on the brakes through gradual rate increases. But right now, they are more worried about moving rates up too fast and risk stalling the slow recovery we've been experiencing.

Insurers can't afford to be patient

Unfortunately, insurers can't afford to be so patient. Even if long awaited rate hikes do eventually appear, the upticks are probably going to be so minor and spread so far apart that the impact on the fixed holdings of carriers is likely to be minimal for quite some time to come. That means insurers may have to consider some major adjustments in their business, operating, and investment strategies to maintain, let alone grow their bottom lines in this "Waiting for Godot" environment.

Yet the ability of insurers to shift gears may be easier said than done, for a variety of reasons. For example, as insurer bond portfolios continue maturing and carriers are forced to keep swapping new, lower-yielding securities for the higher-yields that are expiring, generating growth in investment income is likely to become more problematic, given the volatility in the equities markets and the industry's heavy dependence on returns from fixed-income securities.

That should put increasing pressure on carriers to underwrite and price their own products for profit, rather than depend on investment returns to keep their companies in the black. Yet that course also will likely be easier said than done, given the pressures facing the insurance market itself. Many property-casualty lines, for example, are caught in a rapidly softening market these days, with prices being forced down due in large part to overcapitalization — particularly in the reinsurance sector.

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Ironically, this excess capital can be blamed in part on low interest rates, as alternative sources such as hedge funds and private equity keep pouring money into the insurance business, and while more institutional and individual investors enter via securitization, all seeking higher yields and uncorrelated risks. This massive influx of capital is dampening the ability of mainstream insurers and reinsurers to raise rates to cover not just their basic policy exposures, but to close the gap created by their weakening investment positions.

In response, many have already tried to be more creative with their investment strategies to compensate for stagnant interest rates, but that hasn't always worked out. Some carriers, for example, are cutting back significantly on their positions in hedge funds due to unsatisfactory performance. Meanwhile, a number of life insurers looked to ride the wave of energy development, but plummeting oil prices put a damper on those investments as well.

Alternative strategies

Despite these obstacles, insurers cannot afford to wait around for a rising tide of higher interest rates to eventually lift all boats. With top-line pressures on the rise as premium growth slows down and investment returns become problematic, there are still alternative strategies insurers can deploy to protect their bottom lines from deterioration. Among the possibilities:

• Lower costs and boost margins through operational transformations. The industry still has a long way to go to improve efficiency and productivity in both administration and distribution. This can be achieved through greater use of automation, such as blockchain for transactions, robo advisors for customer service, and artificial intelligence for underwriting and pricing.

• Turbocharge data analytics. Insurers need to get smarter, faster, and more accurate in underwriting, pricing, and claims by leveraging current and emerging data streams, whether the goal is to improve predictive modeling for underwriting, enhance fraud management in claims, or tighten loss control.

• Innovate to generate organic growth in new markets. Whether it's exploring the potential for the Internet of Things in commercial property, workers' compensation, or life insurance, or cracking the code to write more cyber insurance, carriers have to find new sources of revenue and better ways to attract and retain consumers profitably if they are to remain viable over the long term, regardless of the state of interest rates.

• Reconsider the urge to merge. As margins tighten and competition heats up, there may be opportunities to combine forces, both domestic (to boost economies of scale and add capabilities) and foreign (as non-U.S. carriers, particularly those facing the prospect of negative interest rates in their home countries, look to generate better returns by moving capital to more productive locales).

Macroeconomic conditions such as interest rate levels are outside the industry's control, but that doesn't mean insurers can't control their own destinies. What do you think carriers should be doing to cut costs and bolster revenue streams to adapt to life in a persistently low interest-rate environment? What more can they do to reshape their operations, products, and business models to make the best of a difficult situation?

Sam J. Friedman ([email protected]) is insurance research leader with Deloitte's Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.