Making predictions about the year ahead, and looking back to grade the previous year’s predictions, can be a fun game parlor game.
This year, however, writing a 2018 life insurance sector forecast article seems sillier than usual. Simply forecasting how insurance laws will work two weeks from now is difficult. Congress could pass laws that will change everything. Or, it might not.
In place of predictions about what might happen in the U.S. life insurance market in 2018, here’s set of predictions about five questions that may shape our coverage about the U.S. life market in the coming year.
1. What will happen to high-quality corporate bonds and other investments life insurers’ favor?
A U.S. life insurance policy is, in most cases, a sausage casing for highly rated corporate bonds, with some mortgages, mortgage-backed securities, government bonds and other types of securities thrown in for flavor.
Today’s persistently low interest rates hurt life insurers by cutting the interest rates they earn on bonds and other debt securities, but low default rates on bonds have helped life insurers, by reducing default-related losses.
At press time, Jerome Powell appeared to be headed toward becoming the next Federal Reserve Board chairman. Powell and other Fed governors might be the most powerful insurance regulators in the country. Their efforts to mold interest rates will affect how well life insurers’ investment portfolios perform in 2018.
A gradual increase in rates could help push up life insurers’ bond yields, without pushing away their customers.
A big, sudden spike in rates could hurt life insurers, by pushing consumers to replace low-yielding insurance products with higher-yielding products, and by increasing the corporate borrowers’ default rates.
“Not our expectation, but a rate spike would be a global credit negative,” according to analysts at Moody’s Investors Service.
S&P analysts also talk about the potential for a spike to hurt the U.S. real estate market.
“Low interest rates have raised valuations and, in our view, reached frothy levels in some markets,” the S&P analysts write.
Analysts at Fitch Ratings say they assigned a stable outlook to the U.S. life sector for 2018 partly because they assume credit market conditions will remain benign.
An Ebola virus virion (Image: Thinkstock)
Because of life insurers’ hunger to replace low-yielding corporate bonds with higher-returning assets, “commercial mortgage loan originations by life insurers reached record levels in recent years, in a market characterized by increasingly aggressive underwriting, higher leverage, weaker loan structures and high real estate valuations,” Fitch analysts write. “An unexpected spike in interest rates could lead to an uptick in maturity defaults over time.”
2. How well will efforts speed up and simplify the underwriting process work?
Actuaries are talking to the National Association of Insurance Commissioners about efforts to define the terms used in accelerated underwriting, simplified underwriting and simplified issue programs, and to get experience data for the alternative underwriting strategies.
One implication may be that insurers are still in the early stages of analyzing experience data for the alternative underwriting strategies.
Consultants at Ernst & Young point out in their look at 2018 market forces that another question is whether successful pilot projects will work well on a larger scale.
“What will it take to underline the importance of their use case and bring them to full scale?” the consultants ask. “Will the costs justify the means?”
3. How well will life insurers fight off efforts to get at their reserves?
At press time, Congress is considering a tax bill that could pull about $15 billion out of life insurers’ reserves over 10 years.
Moody’s analysts say they think the overall effect of changes in tax rules would be good for U.S. life insurers.
“The magnitude of the net benefit will be company-specific,” the analysts said.
Whatever happens to life insurance provisions, the tax bill debate has underscored the point that lawmakers would prefer to see cash flowing into gross domestic product totals today, rather than sitting in reserves backing obligations that will materialize sometime in the future.
4. Can members of the life insurance community explain themselves to other players in the financial services sector?
The life insurance sector has been so stable, so big and so important for decades that the biggest companies could just go about their business, confident in the knowledge that everyone who mattered understood the importance of life insurance.
Now, many “big life insurance companies” have turned into diversified financial services giants.
The division that writes the life insurance often accounts for less than half of total revenue.
One question is how well employees steeped in the life insurance culture can explain concepts such as tail risk, antiselection and state regulation to people from other financial services communities.
5. What’s up with death?
In the past, death rates for people with life insurance have fallen rapidly. Actuaries have had to race to adjust their mortality tables to reflect improvements in insureds’ life expectancy.
Some fear that factors such as AIDS, opioid abuse, and a spike in women’s use of cigarettes in the 1960s and 1970s may be stopping improvements in life expectancy, or may even be starting to cut life expectancy for members of some age and demographic groups.
Another, related question, always lurking in the background is whether some infectious disease will make a mockery of modern medicine. March 11, 2018, will be the 100th anniversary of the first confirmed case of the “Spanish influenza” flu occurring in the United States. That case was part of a pandemic that infected about one-third of all of the people alive at the time and killed more than 3% of the world’s human population, or about 50 million people.
Life insurers, and reinsurers, live with the fear that a new strain of influenza, Ebola, MERS, Zika virus or a microbe to be named later could prove to be just as deadly.
—Read Yellen Upbeat on Economy Amid GOP Attacks on ThinkAdvisor.