NU Online News Service, Jan. 20, 2004, 5:02 p.m. EST – Terrorism has given a short-term boost to profits in the U.S. group life insurance market.[@@]

Group life accounted for only 2% of U.S. life and health insurance industry premium revenue in 2002 but 6% of the industry’s profits, according to an industry review from Moody’s Investors Service, New York.

Total U.S. group life earnings increased to $1.3 billion in 2002, up from $860 million in 2001.

The group life market “was one of the industry’s bright spots in an otherwise challenging year,” Moody’s analysts write in the review.

But the analysts note that group life profits have returned to 1999 levels partly because of lower expenses for reinsurance. Group life reinsurance costs are lower “because of the lack of new catastrophic coverage to spend on,” the analysts report.

Reinsurers have pulled back from the group life market because of fear of the effects of a major terrorist attack. In the long run, that “is not a positive, in terms of exposure to risk,” the Moody’s analysts write.

Although higher employee turnover and weak investment returns also hurt in 2002, overall group life market conditions seemed to improve in 2003 and should improve further this year, the analysts predict.

The analysts also are predicting that this year will be a good year for sales of individual variable annuities and sales of funding agreement-backed note issuance programs, or “FANIPs,” that are registered with the U.S. Securities and Exchange Commission. Insurers sell FANIPs as funding vehicles for pension plans.

Scarcity of capital appears to be hurting life reinsurers, while concerns about the effects of guarantees on in-force business are affecting the analysts’ views of the individual life and individual health markets.

Group health insurers did well in 2002 and 2003, but their continued success will depend on their ability to increase rates and hold down claims costs, the analysts write.