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Life Health > Life Insurance

Some Speed Bumps Ahead, But Then Wide Open Road For Industry

By Jim Connolly

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After some short-term speed bumps, it’s a wide open road for life insurers, according to Steven Schwartz, a senior vice president in the Chicago office of Raymond James & Associates.

Schwartz made his remarks during the 10th annual insurance conference here of the New York Society of Security Analysts.

In the short term, Schwartz says, life insurers have challenges that include the impact guarantees will have on products, pressures created by rating agency expectations and regulatory requirements, a low interest rate environment, and “perplexing” stock valuations.

But when baby boomers start hitting retirement age and need the products and services of life insurers to help with income and estate planning, the road opens up, Schwartz says.

Guarantees offered as part of variable annuities are popular features with the public, he says, but the real question is “are they priced appropriately?” That question is more important today because of the dearth of reinsurance available for these products, he adds.

Schwartz also says indications are that variable annuity inflows are weak with a lot of sales flows coming from existing business. Indications are that new cash flows have slowed, he adds.

Indexed annuity products are the bright side of the story, Schwartz says, but even this segment of the market might show slower sales once fourth quarter sales are in. The reason for this, he says, is a flat yield curve which makes other financial products as attractive for the consumer.

The current interest rate environment is also causing older life insurance fixed rate business with guarantees of 4%-5% to have margins squeezed between what is paid and what companies can earn on their investments, he notes.

Schwartz says rating agencies have a powerful influence over how life insurance companies operate to the point that they even indirectly affect some companies’ earnings and stock prices.

A “daunting” investment environment is making products such as certificates of deposit competitive with insurance products such as guaranteed investment contracts, fixed rate annuities and structured settlements, he adds.

On the legal and regulatory front, Schwartz notes the favorable tax treatment including cuts in capital gains that were not extended to variable annuities by the Bush administration as well as a new proposal for tax-qualified accounts that has disadvantaged the life insurance industry.

He predicts that if a proposal for a flatter tax rate advances, then “make no mistake, [lawmakers] will go after the inside buildup in life insurance.”

In the regulatory arena, he says, market conduct questions have morphed into suitability questions. The National Association of Securities Dealers, in its Notice to Members 05-50, released in August 2005, has indicated that in lieu of a decision by the Securities Exchange Commission, indexed annuities should be treated as securities.

While one could argue that if these products are sold like securities, then they should be treated as securities, Schwartz says the NASD’s position is that they are securities not only if they are sold like investments but even if they are funded by investment decisions.

That, Schwartz continues, can be said about any insurance or banking product. “The NASD is making a move to extend its power into the entire financial services arena,” he adds.

And, on the issue of suitability, he says there are many in the 65-plus category who are more than capable of making appropriate decisions regarding the purchase of annuity products.

In spite of these travails, “the future of the life insurance industry is extraordinarily bright in my opinion,” Schwartz says.

The reason, he adds, is the same people that used “Gerber, rode Schwinn and Huffy bikes, and bought Levis” are ready to be helped by life insurers and the services that they can provide. The baby boom generation is “like a mouse going through a snake and at the end of the snake is the life insurance industry.”

The need to save for retirement, consider wealth transfers and preserve assets will make the years from 2009 through 2050 a “golden age” for life insurance, he says.

That need will be intensified by the fact that younger boomers do not have the security of defined benefit plans and will have to recreate that security as well as the increase in life expectancy, Schwartz says. He cites data that suggests for a married couple, a 65-year-old husband today will live 18 years more on average, while a 65-year-old wife will live an additional 22 years on average.

Coupled with other factors such as the uncertainty of the Social Security program and the need for long term care insurance in this country, Schwartz says life insurers have great opportunity.

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