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?
Variable annuities. VA insurers offer attractive living benefits with asset protection features that have driven industry success in recent years. Keeping assets in separate accounts offers protective mechanisms to consumers. Meanwhile, company guarantees on assets, such as guaranteed living withdrawal benefits, provide downside protection that no doubt all Americans might wish they had over the last year.
A sound marketing theme revolving around protection of assets should reverberate loud and clear with financial customers, including among those who do not hold VAs today.
Immediate annuities. Insurers have for some time now been eager to increase sales of immediate annuities. Market conditions are ripe for a message that assures that incomes from fixed immediate annuities are guaranteed–regardless of market conditions. Many Americans today would be very happy indeed to know that their monthly and annual incomes are assured.
Annuities with long term care features. Maintaining income levels can be viewed in the context of the level of income over expenses. When expenses increase, consumers would like to see their income increase commensurately. For example, a major concern of those ages 55 and up is how to pay for long term care costs. The appeal of annuity vehicles can be further increased, and considerably so, by the including LTC provisions that effectively increase income levels when LTC costs increase.
Insureds holding well structured annuity policies will be able to receive LTC benefits from them on an income tax free basis. That will be particularly important as the costs of current bailouts and the massive federal deficits of the past 8 years are imposed on taxpayers. Expectations are that higher income taxpayers will be most affected, and consequently the impact of the tax treatment should be viewed especially favorably.
Note that, to the extent that account values reflecting gain are included in LTC payouts, these payments of gain will not increase taxable income (i..e., they are tax free).
Many years ago, a distinguished entrepreneur-jeweler in Hartford told customers dealing with him that they would have “peace of mind guaranteed,” or “POMG.” Insurers can capitalize on these brutal times and customer needs for predictable cash flows by offering POMG generally and POMG products specifically to their customers.