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Life Health > Life Insurance

FIO's red flags: impact of low interest rates & lack of agents

By Arthur D. Postal

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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.

“While the Internet has transformed how insurers and insurance producers interact with consumers, many consumers still prefer in-person contact with an insurance producer,” the report says.

It also says that despite the decline in the number of life insurance policies sold to individuals, “consumer surveys suggest that demand remains high, with one in four U.S. consumers expressing a need for more life insurance,” the report said. Additionally, an increasing number of consumers need sound advice to achieve retirement aspirations, the report said.

“FIO continues to monitor life insurance sales and the number of life insurance producers to ascertain whether policymakers should consider efforts beyond the current effort” to have legislation creating the National Association of Insurance Agents and Brokers (NARAB) enacted, the report said. The report says if creation beyond NARAB doesn’t work, FIO will work to ascertain “whether policymakers should consider efforts beyond NARAB to encourage producer licensing and to promote access to essential insurance products.”

In discussing the Model Suitability Regulation adopted by the National Association of Insurance Commissioners (NAIC), the FIO report said it must be adopted by all states in order for all prospective annuity owners to receive the consumer protections the model law mandates. The report said the model law was adopted by seven states in 2013, bringing to 30 the total number of states that have adopted it in full. The report said three additional states have adopted only the training program created through the model law.

“With unprecedented numbers of seniors reaching retirement age and living longer, annuity suitability standards should not vary based on geography and should meet or exceed a common standard,” the report said. “FIO will continue to monitor and report on the states’ progress toward full adoption” of the modern law, the report added.

See also: NAIFA’s message to Congress: Leave our products alone

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