Premiums Increase as the Number of Insureds Declines for Life/Annuity Industry
Insurers adapt to low interest rate environment by adjusting product offerings to manage impact on profitability.
Insurance Networking News, October 22, 2012
More than 118 million Americans, or 52 percent, over age 18 do not own life insurance in 2012, compared with 51 percent last year, according to a Genworth Financial phone survey of more than 25,000 adults. However, based on annualized premium dollars, the industry grew 4 percent in 2011, according to LIMRA, and according to A.M. Best, it grew 3 percent in the first six months of this year.
Net operating earnings for the U.S. life/health industry are also up, having increased 19.5 percent to $23.3 billion in the first half of 2012, compared with $19.5 billion generated for the same period in 2011, according to A.M. Best. Statutory net income increased 33.8 percent to $19.1 billion for the first six months of 2012, compared with $14.3 billion for the same period last year. The increase was predominantly due to higher operating earnings and lower realized losses.
"A major reason for this trend is the increase in the more pricey whole life insurance contracts which offer more guarantee, on the expense of other flexible premium life contract,” said Ed Sneneh of Insurance Navy, adding that sales volumes are improving.
The increases also came despite a persistent low-interest rate environment, which has depressed earnings. However, A.M. Best notes that this has been offset by a “net increase in invested assets derived from positive net flows, rising equity markets and the benefit of pricing actions taken in the second half of 2011.”
A.M. Best further noted the volatility of interest rates as measured by the 10-year Treasury bond in the first half of the year, and that while they rose by 35-basis points in the first quarter, they declined by 56-basis points in the second. A.M. Best also noted that insurers have adapted by de-emphasizing fixed annuities and universal life, while growing sales of variable universal life, indexed universal life and traditional term insurance.
Life/health insurers also are adjusting product offerings to manage the effects of low-interest rates on the profitability of certain products, revising annuity offerings and adjusting living benefit riders and refilling with lower minimum guarantees, many of which are now 1.5 percent or lower.
Asset allocations models are reverting to risk-on profiles after the de-risking that was predominant during the financial crisis of 2008 and 2009. A.M. Best said it has seen greater allocations to NAIC2-rated (investment grade) fixed-income securities, private placements and alternative assets, such as private equity. As a percentage of total invested assets, this shift “remains modest to date and is not expected to significantly affect the overall credit quality of portfolios,” the report reads. The overall allocation to commercial mortgage loans remains consistent, as maturing loans are essentially being offset by new originations and a modest amount of restructurings.
As a result of the persistent low-interest rate environment, in 2012 there has been a shift away from both the fixed and variable annuities business, which increased 10 percent in 2011.
And, as people nearing retirement are concentrate on rebuilding wealth that was lost during the crisis, companies have continued to de-risk product portfolios to mitigate compressed spreads and volatile earnings, and de-emphasized interest-sensitive product lines.
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