The life insurance industry enters 2014 with a view that it is coming out of a very dark tunnel, a period of unprecedented low interest rates and the worst economic turbulence since the 1930s.
There is a perception that there are grounds for optimism, with the Federal Reserve Board signaling in December that it would begin curtailing purchases of bonds that had sustained several years of virtually zero interest rates, and with the stock market coming off two years of impressive growth.
Regulatory pressure, too, has eased, as balance sheets have improved and both companies and regulators have expressed confidence that the potential hit to companies through commitments on guarantee riders in variable annuities is now manageable. Insurance analysts, too, support the bandwagon, forecasting strong growth in 2014 for stock insurers, although acknowledging that each company is different.
The early January disclosure, however, is that employment growth in December was disappointing and should be a wakeup call for insurers. It is a sign that pragmatism rather than optimism should be the operating phrase for insurers and agents in the New Year. The December numbers indicate that the Fed will be cautious in withdrawing from the bond market, and that the path to higher interest rates will not be straight up.
Furthermore, all signs point to the fact that rancor in Washington will continue for the foreseeable future, affecting insurers in a number of ways. One being that it rules out support for government-sponsored stimulus programs that are much-needed to spur economic growth. That also reduces the chance that private industry will be encouraged to be vigorous in their new investment plans, and that they will continue to rely on cost-cutting to maintain profit growth – the current trend.
Market analysts also note that the two-year hot streak for the stock market, which at least one analyst calls “gravity-defying,” is unlikely to be sustained. That will impact fee income growth for insurers serving as plan administrators for 401(k) and defined benefit plans.
But, of greater concern is that insurers’ share of the financial services pie has been declining for decades. Whether insurers like to believe it or not, the strong growth market for variable annuities in the mid-1990s masked a trend of declining interest in whole life insurance, a trend exacerbated by the fact that sale of small face-value policies, or industrial life, had been declining since the 1960s, when the familiar sight of life insurance agents walking through neighborhoods collecting weekly on small-face value life policies began to disappear.
Besides VAs, sales of variable life insurance policies have slowed significantly because of the prolonged period of low interest rates. And, Corporate-Owned-Life-Insurance (COLI) is no longer the strong profit generator it was in the early part of this decade. Added to that, moves over the last decade to slash estate taxes has reduced the need for middle-income Americans to seek out the insurance agent for life insurance products designed to ensure that future generations can share in the success of their parents.
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The sale of life insurance suffered as the result of this trend, climaxed by the compromise legislation enacted in 2012 that raised the exemption to $5 million per person and also contained provisions that eased the ability of couples to benefit from the joint exemption. But, equally important, it reduced the incentive for middle income folks to seek out the life insurance agent, and therefore exposure to other products sold by life agents.
This is a disturbing trend. It threatens the long-term ability of insurers and agents to compete head-to-head against asset managers – the major competitors with insurers for management of the consumer financial services dollar. Developing new products that stand up well against the competition, and a commitment to strong and innovative marketing, is as important going forward to the insurance issuer and producer as is rising interest rates.