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.