Reflections and red flags

As we prepare for the interlude occasioned by the holiday season, we should reflect on a tumultuous year in the life insurance industry. Despite a government shutdown, another year of zero interest rates and a turbulent rollout of the federal health care exchange site, signs are clearly emerging about the future of an industry that is in motion.

For example, the federal government has now designated two large insurers for federal oversight: American International Group and Prudential Financial. Down the road, others will likely see the same. While actual federal regulation of the two firms won’t begin until 2015, the Federal Reserve Board has been actively serving as consolidated regulator for insurance companies with thrifts for at least a year, and while a number of insurers have downgraded their thrifts, those that actively lobbied against Fed regulation but retained their thrifts seem to have accepted the federal presence.

The Fed has also applied for membership in the International Association of Insurance Supervisors (IAIS) because it wants a hand in shaping regulations abroad for domestic insurance companies. Over the short-term, there is likely to be friction as the various state and federal regulatory agencies vie for influence in international insurance supervisory activities.

However, as time goes on, Fed involvement might facilitate U.S. insurance companies’ expansion into foreign markets as a means of accelerating growth. In other words, instead of a detriment, involvement of federal regulators in life/health insurance regulation might spur a greater role for insurers in both the domestic and international financial markets going forward.

As for interest rates, the Fed will likely move early in the new year to raise interest rates. That will create a tricky transition for U.S. insurers, but in the mid-term will certainly allow them to increase growth and make insurance products even more competitive in the domestic financial market.

Especially affected have been products sold with variable rates, and with guarantees. This was a key market before the Fed began lowering rates to deal with the severe economic downturn. As industry officials have pointed out, variable life insurance policies have lost favor as interest rates have declined, especially for older consumers, reducing their ability to increase the value of their policies. As a result, many have turned to exchange-traded funds as an alternative.

Continued enforcement actions by state insurance regulators and treasurers/unclaimed property officials are of deep concern. The industry is divided on how the issue should be handled. So are regulators. Some want to continue with the dual enforcement action, while others believe that enough is enough. The strongest concern of both industry and regulators is the impact of the probes on smaller insurers as investigations of large insurers and the ensuing penalties as the investigators turn their attention to the smaller players.