On the opening day of this year’s Association for Advanced Life Underwriting annual meeting in Washington, D.C., National Underwriter Senior Editor Warren S. Hersch interviewed Katharine Wolchik, a managing economist and head of global economics at New York-based American International Group. The following are excerpts.
Hersch: What is AIG’s growth forecast for the world economy in the near-term?
Wolchik: Despite recent challenges to the U.S. and world economies, including the fiscal cliff, the sticky unemployment rate and debt sovereignty crises in the Eurozone – including Italy, Spain and Cyprus – we expect growth for the balance of 2013 and 2014, including in the U.S. and the Eurozone. A main driver of growth in the U.S. will be residential investment – a key component of gross domestic product – which will dominate the headlines and numbers. We also expect that excess slack in the economy, or one that is performing below potential GDP, will help cap inflation at about 2 percent.
We also anticipate through 2017 an expansion of emerging markets, which will be the main engine of growth globally. There will also be more quantitative easing, both here in the U.S. and in Europe, but you’ll see less system retrenchment than in the past. The Eurozone will stay together in its entirety; don’t expect Greece, Italy or Spain to leave the Eurozone anytime soon.
Unfortunately, the low interest rate environment is here for the near-term, based on our forecast of economic growth and the unemployment rate. The earliest we have interest rates increasing is in 2015. As for the U.S. housing, we expect the market’s recovery to be slow.
Hersch: What does AIG forecast for the U.S. life insurance market?
Wolchik: The U.S. is underinsured: Only 44 percent of U.S. households now have life insurance. Thirty percent of households – 35 million – have no life insurance coverage. This is up from 22 percent in 2004. And 11 million households with children under 18 have no life insurance. A big contributing factor is folks in the middle and lower-income classes, who are very stretched right now.
Hersch: What trends has AIG observed in respect to life real premium growth since 2011?
Wolchik: World life insurance direct premiums have declined by 2.7 percent in real terms since 2011. Both advanced and developing economies had negative growth rates: Advance economies contracted by 2.3 percent, whereas emerging markets shrank by 5.1 percent.
Much of the decline in advanced economies can be attributed to Western Europe, including Germany, France, Italy and the U.K, which saw their economies dip by 7.1 percent, 15.6 percent, 20.2 percent and 3.3 percent, respectively.
We expect that the downward trend observed in 2012 will continue through 2013. On a positive note, we expect the 2.3 percent rebound in the U.S. since 2011 will also continue in tandem with the uptick in the economy.
As to emerging markets, the 5.1 negative growth can be attributed to real premium slides in the Southeast, which fell 10.4 percent; as well as shrinkage in China and India, which were off by 14.8 percent and 8.5, respectively. These two countries, both large components of the emerging markets, saw regulatory changes that negatively impacted distribution.
However, Latin America’s market rose 9.5 percent, fueled in large measure by Brazil’s expansion (up 10.2 percent) and Mexico (up 7.2 percent). The Middle East and Central Asia also saw gains, rising 9.4 percent, as did Africa, up 1.3 percent.
Hersch: Which products are contributing most to premium growth trends in the U.S. and Europe?
Wolchik: A large component of the market is savings or risk premiums, which are being driven by growth in annuities and pensions. This makes sense, given the aging populations of the U.S. and Europe, which boost consumers’ need for these products.
Hersch: Can you speak to the headwinds and tailwinds affecting life insurance sales?
Wolchik: In respect to headwinds, premium growth is slow in the U.S. and Canada; and it’s negative in Europe. The global recovery remains fragile. The low interest rate environment will remain challenging, as will Eurozone risk and macroeconomic and financial volatility.
As to tailwinds, we’re looking at strong growth in emerging markets in both 2012 and 2013, fueled by premiums gains in China and India. Overall, AIG’s outlook for the life insurance market remains stable, taking into account both downside risk in the developed markets and positive potential in emerging markets.
Hersch: Which life insurance products and risk are most affected by trends in the global economy?