Concerns about the impact of low interest rates on the solvency of insurers, as well as a steep drop in the number of agents, are key life insurance issues raised in the 2014 annual report of the Federal Insurance Office (FIO).
The report also raised concerns about the lack of uniformity in annuity suitability standards, especially with “the unprecedented numbers of seniors reaching retirement age and living longer.”
Regarding solvency, the FIO said the life and health insurance sector continues to report investment margins that were lower than historic averages in 2013. It said net investment income increased by slightly less than one percent in 2013, and the report said that if low interest rates are sustained, “life and health insurers might face more challenges in generating investment returns that are sufficient to meet the cash flow demands of liabilities.”
The report said that to counter this trend, some life and health insurers have modestly extended portfolio durations or invested in lower credit quality fixed income assets, or both. “Movement into long-duration and lower quality assets may increase the vulnerability of life and health insurers to potential adverse effects of spikes in interest rates,” the report said.
For example, under such scenarios insurers may not be able to increase benefits rapidly enough to stem surrenders as contract-holders pursue higher yields elsewhere, and thus insurers may have to fund surrenders with asset sales at reduced prices.
As for distribution, the FIO report raises a red flag that should have been raised years ago. The report says industry officials say the agent sales force has decreased by one-third since the 1970s, and is expected to decline further as the baby boomers generation enters retirement.
The report notes that the decline in producers “may partially explain” the three percent decline in individual life sales in 2013, ending two years of positive policy count growth in the U.S.