We live in interesting times, with an amazing sequence of events unfolding over the last few months in the financial sectors.
Even in life insurance, we have seen the storm clouds building, with variable life sales declining, individual life sales flat to off, universal life sales flattening out, and indexed UL grappling with spillover from the Securities and Exchange Commission’s proposal to treat indexed annuities as securities. In addition, new current-assumption ULs are being developed with flatter cost of insurance scales, in part to protect life companies by making the business less attractive to life settlement buyers. Capital relief mechanisms have been affected by the credit crunch, and rating agencies are reacting to broad-based financial concerns.
Are these clouds over life insurance combining to make a major, damaging storm, or is there a silver lining already shining through?
The answer is, yes, reasons do exist for optimism. Here are several:
o Aside from asset volatility, there is an underlying stability of returns in most core life businesses. Direct writers’ mortality experience is often smoothed by reinsurance, and the use of catastrophe bonds for mortality risks has further assisted the industry. Hedging programs are widely used in the industry to offset risks of market-based guarantees on life or annuity products, and recent experience is showing that these programs are highly effective.
o For most life companies, adequate-to-strong published capital positions are in place plus hidden capital in current statutory life insurance reserves.
o This should be a time to boost consumer perceptions of the life insurance industry’s strengths, compared to many other financial services providers. At least one insurer has already done this in a new consumer advertising campaign, and several more have already issued reassuring statements about their financial strength.
o For many insurers, this may be an opportune time to pursue a stock buy-back program. Eight of 15 major carriers in 2nd quarter 2008 analyst calls indicated they had already executed buy-backs.
o Retrenching is occurring in the life-settlement market. For instance, a major life-settlement underwriter recently made significant changes to its mortality tables that some expect will ease the pricing tensions that exist between life-settlement providers and life insurers.
o The Pension Protection Act of 2006 includes provisions that feature enhanced tax treatment for combination plans, beginning January 1, 2010. Combination plans couple life policies and annuities with long term care insurance. Since LTC is a vastly underserved market, with less than 10% of the target market having purchased the coverage to date, these combo products provide new mechanisms to address this compelling consumer need. Many of the combos already on the market involve a form of self-insurance, tapping into base-plan policy values to pay for LTC, thereby reducing the cost to the consumer and the risk to the insurance company. Soon, these products will be available with the more favorable tax rules in effect.
o Life insurance underwriting is employing an increasing level of sophistication. The life industry has built on the value of blood testing and multiple risk classifications, for instance, by adding new expertise in the evaluation of functional and cognitive impairments at older ages, and in the use of non-invasive methods to underwrite, including telephonic applications and prescription-drug profiles.
o Principle-based approaches for reserves and capital are receiving significant attention and industry support. This should eventually provide further capital relief for the industry in total. Other emerging opportunities to release trapped capital may be derived from developing international accounting standards, or through the re-emergence of capital market solutions as the broader financial markets stabilize. This in turn should allow insurers to continue developing attractive life products that deliver sound value to insureds.
o Consumers in times such as these tend to pursue a flight to safety. A LIMRA survey confirms that people still are looking for financial security, wealth/inheritance transfers, pay-off of debt and payment of estate taxes as reasons to purchase life insurance. These factors generally stand up well in the face of economic volatility. Fundamentally, consumers are looking to the industry to address these needs by reducing risks for policyholders, and the guarantees embedded in many life insurance plans resonate with those themes.
Going forward, many life insurers will undoubtedly need to put special focus in the short term on investment and financial reporting issues. But this is a time when it may be most critical for them to focus on consumers and their underlying insurance protection needs, and on products and marketing programs that support the continued flow of premium dollars into the industry and the orderly, reliable flow of insurance benefits out to policyholders.