Future growth in the US life
insurance is a matter of managing capital and risk in an uncertain
environment, Ernst & Young (E&Y) has emphasised in their
new Global Insurance Center US Outlook.
Those life insurers that
manage the associated multiple variables will be the winners of the
tumultuous years ahead, predicts the professional services
firm.
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Laying the groundwork for
future growth while wrestling with low interest rates and volatile
equities markets presents a significant challenge for insurers, but
it is critical they begin to size up opportunities ahead, E&Y
advised.
They stressed that the
probability of a great deal of organic growth for life insurers is
very low given the chronically high unemployment rates dogging the
market for new policy sales.
Putting further limits on
organic growth is the reality that retirement account assets are
still recovering from losses suffered in 2008, delaying further
development of the retirement income market.
Even variable annuity sales,
which increased in the first half of 2011, saw heightened volatility
in the second half of the year that has darkened the outlook for
2012.
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By GlobalDataThrow in the potential for
regulatory changes and looming capital requirement changes, and it
is safe to say that organic growth rates will be
miniscule.
In its report, E&Y
explained that US life insurers might need to improve earnings
through such non-organic means as an opportunistic acquisition,
while building the foundation for organic growth after
2012.
“Larger and well-capitalised
insurers may explore options outside the US for both organic growth
and strategic acquisitions, although some foreign markets are
becoming less attractive due to increased competition and their own
changing economic circumstances,” stated E&Y.
“Multinationals with
operations in the US may continue to feel ongoing impacts from the
eurozone crisis, and there could be secondary effects for US-based
insurers as well.”
Low interest rates a
certainty
The only thing that is certain these days, it seems, is
that insurers will be operating in a low interest rate environment.
The Federal Open Market Committee’s unprecedented decision in
August 2011 to lock in a low interest rate environment until 2013
ensures that life insurers must manage through nearly two years of
guaranteed low interest rates at the short end of the yield
curve.
E&Y also stressed that
the very low interest rate environment increases the risk of spread
compression for existing products, while also dampening enthusiasm
for fixed annuities and universal life insurance.
The same conditions earlier
in the decade led some insurers to chase yield thus assuming
greater risk which resulted in losses during the credit crisis of
2008.
The result, noted E&Y, is
that risk-adverse, insurers may now avoid some of the simpler ways
of improving performance, such as increasing the asset portfolio
duration [average maturity] of their general account.
E&Y suggested that a more
sophisticated approach to interest rate and market risks to
possibly protect an insurer’s surplus position and simultaneously
promote growth, is to improve the asset and liability matching and
management process.
This, according to E&Y,
can reduce variability in surplus and prepare for possible future
interest rate changes.
E&Y warned that if
interest rates climb rapidly in 2013 when the Federal Reserve
Board’s freeze ends, disintermediation risk could become a concern,
as policyholders may lapse existing policies in favour of investing
in new policies with higher credited rates.
Understanding the interaction
of the asset and liability cash flows under a variety of scenarios
will help prepare insurers to weather these uncertain financial
times, E&Y emphasised.
E&Y believes that life
insurers may also be challenged by future Congressional efforts to
reform the federal tax code, and US budget deficits and revenue
generation are serious concerns.
The health of the economy
will be a central political issue in the 2012 general election.
That could lead to structural changes to the tax code, which may
have significant repercussions for the life insurance
industry.
“In order to avoid the
dangers seen in the recent financial crisis, insurers need to more
fully comprehend the structure and safeguards among their assets,”
E&Y stressed. “Utilising a variety of stress scenarios to
understand counterparty risks, correlations in credit risk, capital
requirements and cash flows can help insurers better evaluate
investment opportunities. Looking through the lens of risk-adjusted
returns can give confidence as to whether or not the insurer is
receiving a sufficient return for the asset risks being
absorbed.”
Go online, advises
E&Y
E&Y also urges insurers to more fully embrace internet
distribution. While other sectors have been nimble in adapting to
the internet and leveraging its opportunities, life insurance
companies have lagged behind.
The extent of life insurer
presence on the internet largely consists of financial calculators
of insurance needs, sales lead-generating activity like educational
materials and product information and proprietary internet
applications that support the sales force through online insurance
application forms and illustrations.
This, notes E&Y, may be
due to the nature of the sector’s products and services, and the
complexities and subjectivity of underwriting, but the time has
come for the industry to move past its hesitance and embrace online
sales and distribution.
However, E&Y pointed out
that the newest generation of insurance buyers is young, internet
savvy and what it describes as “transactionally
self-sufficient”.
Such consumers have grown up
in a self-service culture, and spend a significant portion of their
time transacting online. While insurance in its current form does
not lend itself well to internet sales, it can be better leveraged
to develop stronger ties to customers and build a better
brand.
“In the future, it will be
possible for a consumer to submit applications to several insurers,
receive competitive quotes, and be educated by web-based
information on the insurers, decide which insurer best suits his or
her needs and wallet,” noted E&Y.
“Creating incentives for
consumers to transact online, much in the way many airlines do,
could guide lower premium options, versus purchasing insurance
solely through an agent.”
E&Y also urges insurers
to make effective use of analytic and predictive modelling
techniques to improve speed and accuracy of underwriting.
Ultimately, the faster applications are processed and accepted, the
more policies are issued, E&Y observed.
Predictive modelling also
brings with it the ability to analyse policyholder behaviour and
target marketing at individuals most likely to buy specific
products. Banks, notes E&Y, have long aimed their products at
people who have recently purchased a home, and producers of baby
products are especially adept at putting advertising material in
the hands of new parents.
“Insurers can learn from
these experiences,” E&Y concludes.
Charles
Davis
