A.M. Best Special Report: Life/Annuity Insurers Regain Ground as Economy Strengthens
February 24, 2011 by N/A
| Copyright: | (c) 2011 A.M. Best Company, Inc. |
| Source: | A.M. Best Company, Inc. |
| Wordcount: | 388 |
The life insurance industry continues to strengthen its balance sheet and liquidity and is positioning itself for future growth and improved earnings. While quantitative improvement in the industry’s capital position is clear, qualitative improvement is not. Also uncertain is the ability of the life insurance industry to generate pre-crisis returns and revenue growth in the near term. Nevertheless, given the overall improvement in the financial condition of the industry and the economy, the rating outlook for the life/annuity segment is stable.
Economy – Interest rate risk lies on both sides of life insurers’ balance sheets, given the high proportion of fixed-income investments and substantial exposure to interest-sensitive products. Most problematic scenarios for the life industry would be a rapid rise in rates or persistence of the current low rate environment (and perhaps even a further decline).
Investments – Industry investment results benefited in 2010 from the narrowing of credit spreads; lower levels of impairment; generally rising interest rates; strong equity market performance and modest improvement in macroeconomic fundamentals. Real estate remains an issue for insurers’ balance sheets.
U.S. Life Reinsurance – During the financial crisis and continuing to the present, A.M. Best Co. has viewed the rating outlook of the life reinsurance market as stable. Should reinsurers accept increased levels of noncore business, they potentially add to their risk metrics and create further uncertainty with respect to the longer-term performance of the U.S. life reinsurance sector.
Sales and Distribution – Life sales improved in the first half of 2010, but growth in individual life insurance became more sluggish in the latter part of the year. While the insurance industry has succeeded in developing a variety of additional individual annuity distribution channels, it has realized only limited success in doing the same for individual life distribution.
Accounting & Regulatory – Recent tax decisions, potential accounting changes and regulatory reform are pressing concerns for life insurers for the near to medium term. While there has been some progress toward achieving permanence and clarity with respect to key regulatory and accounting issues, there still is room for improvement.
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