What is a spread?

A spread is the difference between the actual earnings on investments and the credited rate that is declared and guaranteed by the insurance company for that period, which is subject to the minimum rate guarantee. An insurer attempts to earn a spread using assumptions based on many factors such as the magnitude and timing of deposits, participant cash flows, investment performance, rate environment, and potential credit impairments. Spread is used to compensate the insurer for risk, capital charges, and other expenses.

Spread does not equal profit. There is no certainty an insurance company will earn a spread, however the stated rate of return to plan participants is guaranteed. Investment yields need to be greater than the rate credited to generate profit and that is not always the case. If the investments underperform or if any of the assumptions are inaccurate the insurer is still held to the declared credited rate and the guaranteed minimum rate.

Other products such as fixed annuities and certificate of deposits also earn a spread income that is expected to be higher than the guaranteed rate.