Moody’s: US life insurance sector outlook revised to stable amid solid fundamentals
November 15, 2017 by Moody's
New York, November 14, 2017 — Moody’s Investors Service has revised the outlook for the US life insurance sector to stable from negative, reflecting the sector’s resilience in the face of a low interest rate environment, as well as its strong capitalization, aided by strong equity markets and low asset defaults.
For the next 12 -18 months, life insurers will be sustained by a favorable economic scenario, which includes a gradual rise in interest rates that is supportive to revenue and capital improvement.
“US life insurers have adapted to the low rate environment through adjustments to product design and new business strategies, and are likely to continue developing and pursuing these strategies over the outlook period,” Manoj Jethani, a Moody’s Vice President says.
Moody’s says demand for US life insurance and annuity products will be driven by continued modest economic growth and low unemployment levels. Moreover, this will be underpinned by robust equity markets, which will continue to create incremental wealth and allow for discretionary purchases such as life insurance, annuity products, and greater contributions to retirement plans, among other insurance products.
Capital levels are anticipated to remain strong owing to improved profitability due to lower asset defaults, higher equity markets, which has lifted fee-based income, as well as better risk management to protect capital in “tail” downside scenarios. While capital is expected to remain strong, further improvement for publicly traded companies will be moderated by shareholder pressure.
“The insurance industry is heading towards deregulation as recent actions suggest the current administration’s focus on scaling back regulation,” Jethani says. “This trend has mixed results for life insurers, with the credit impact heavily dependent on implementation details.”
The removal of the systemically important financial institution designation is a negative development for the industry. However, this is offset by efforts of other regulators, including state and international, to coordinate evaluation of insurance groups on a holistic basis and could benefit the insurance industry.
On the other hand, a delay in the full implementation of the Department of Labor (DOL) fiduciary ruling is credit positive since the “best interest contract” exemption exposes an advisor’s “financial institution” to significant litigation risk — which is a distributors’ single largest concern with the DOL rule. The uncertainty created by the DOL has resulted in some pressure on affected products, such as variable annuities and fixed indexed annuities.
Over the next few years, increased focus on technology and innovation will be key for life insurers to connect them faster and more digitally to their distributors and customers with insurance products and services that are relevant to today’s more technologically oriented consumer.
The report “Life Insurance — US: 2018 outlook stable as insurers adapt to low rates, capitalization is strong,” is available to Moody’s subscribers at.
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1099761
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Manoj Jethani
Vice President – Senior Analyst
Financial Institutions Group
Moody’s Investors Service, Inc.
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