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Why life insurers face a challenging road ahead

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A report in early May from the Financial Stability Oversight Council (FSOC) stated that life insurance industry revenues declined 9.6 percent from the record 2012 level of $645 billion. This in itself should give insurance industry officials enough pause to be concerned about the future independence of the industry.

But there are other concerns. Besides signaling to members of Congress that life insurance company creation of captive insurers is something the FSOC is watching closely, the report also said that “Despite a significant rise in longer-term interest rates this past year, the insurance industry continued to report investment margins that were below historic averages.”

The report added that, “If historically low interest rates persist, insurance companies could face a challenge generating investment returns that are sufficient to meet the cash flow demands of liabilities.”

At the same time, three of the largest industry players, American International Group, MetLife and Prudential Financial, had earnings “misses” early in the month, meaning that either their revenues or profits failed to meet analysts’ expectations. While AIG’s life unit did very well, its property casualty operations suffered because of losses from weather events or fires, an issue that analysts fear will be persistent.

Besides these difficulties, Association for Advanced Life Underwriting officials told attendees at its recent meeting in Washington that changes in tax laws proposed in a discussion draft of the U.S. House Ways and Means Committee could prove “devastating” to the industry, notably in respect to sales of permanent life insurance products used to fund non-qualified deferred compensation plans for business executives.

Moreover, the AALU officials said it is wrong to assume that the proposal is “dead on arrival,” because strange things can happen in Congress. Officials of the National Association of Insurance and Financial Advisors are telling members who contact their representatives that they should carry the same message AALU members delivered in early May — that enactment of the draft proposal would “devastate” the life insurance profession.

Added to all of this is the fact that the political atmosphere in Washington has turned dark. Addressing critical issues with meaningful legislation is out the window as both Republicans and Democrats battle for control of Congress through the November mid-term elections, using rhetoric and creation of committees to investigate phantom conspiracies as a means of keeping their bases on edge.

A shift in control of the Senate is seen as likely through the mid-terms, meaning that the current rancid political atmosphere will be with us for at least the next three years, making a stimulus program aimed at promoting economic growth unlikely. This means that the current low interest rate environment, which is hurting growth for all financial institutions, will continue.

Moreover, a battle for control of the House has emerged between the moderate leadership of the Republican Party and more extreme elements of the Republican caucus, egged on by such radicals as Sen. Ted Cruz, R-Texas. This has been displayed in the House Financial Services Committee through demands of the conservatives for an effective phase-out of the Terrorism Risk Insurance Act, as well as recent comments by panel chairman Rep. Jeb Hensarling, R-Texas, that the FSOC should cease designating non-banks as systemically significant until a more “transparent” process for doing so is created.

The comment at an early May meeting by Hensarling indicates he intends to be aggressive in blunting the Obama administration’s efforts to have a role in insurance regulation, which more moderate members of Congress believe is appropriate. Hensarling’s move is creating concern that he is building a bully pulpit to challenge any effort by the federal government to be involved in insurance regulation. This is making industry officials — who seek discourse, not rancor —uncomfortable.

All of this makes clear that the current economic and political atmosphere poses challenges for the life insurance industry, both insurer and agent, and that the industry should be prepared to deal with them.


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