Consolidation in the North American life insurance industry should help keep the industry stable in 2006.[@@]

Julie Burke, a managing director in the Chicago office of Fitch Ratings, gave that assessment during a recent teleconference.

Mergers and acquisitions tend to create larger, more diverse, more adaptable companies, Burke said.

Life M&A activity should lead to “transactional upgrades” in 2006, but, if consolidation failed to materialize, downgrades probably would outnumber upgrades over the next 12 to 18 months, according to Fitch analysts.

Bigger life insurers tend to be sturdier life insurers because they can spread overhead costs over more sales, invest more in technology, and get more shelf space for their products, Burke said.

Although niche insurers will continue to exist, conditions could be challenging for many of those insurers, and the gap between typical ratings for niche players and big insurers could widen, Burke said.

Other Fitch predictions:

- Regulatory oversight will affect sales of equity-indexed annuities and variable annuities.

- A shift to payout annuities may lead to a loss of liquidity for consumers and producers.

Meanwhile, Fitch is raising its U.S. health insurance and managed care outlook to positive, from stable, partly because of a lack of negative legislative, regulatory or legal trends.

But rising health care and health coverage costs eventually could destabilize the U.S. health care system, increasing the potential for government intervention, according to Douglas Meyer, a senior director at Fitch.

Meanwhile, state regulators may look harder at health insurance premium rate filings, Meyer said.