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.
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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.
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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.