The unprecedented implosion of United States and world financial markets that has taken place within the last year and which has only accelerated over the last few weeks carries both risks and opportunities for U.S. domestic insurers.
While it is hard sometimes to address such issues as the financial deterioration progresses, this is the time to prepare for the revival of markets. A discussion of these risks and opportunities, with focus on the latter, is the objective of this article.
When financial troubles first surfaced last year, and banks and investment banks took write-downs to reflect the greatly reduced value of their assets, markets and in fact all of us hoped that the damages were limited to what had been announced. There was also hope that the actions would be sufficient to contain the damage.
That hasn’t been the case. As of this writing, the situation doesn’t yet show signs of stabilizing. Recently, 2 major U.S. insurers have taken heavy financial hits. Even if further implications for the insurance industry are limited, what can and should insurers do at this time?
The first consideration of U.S. insurers is to assure their businesses maintain profitability or limit any losses. Confidence in the industry is an essential requirement for market success.
That’s especially important now because the industry has an unprecedented opportunity to increase its share of financial assets. Insurers maintain extensive financial models to test product profitability and company performance reflecting both the performance of assets and liabilities. These models and the assumptions used within them will no doubt be reviewed carefully and modifications identified.
Of key concern to annuity writers are issues such as hedge costs and living benefit election rates. If the industry can confirm a strong financial position despite financial market stresses, it should effectively and broadly convey that message to the American public.
In the annuity business, where are the opportunities especially great?