The FIO's Take on Emerging Trends and Current Issues in the Industry
June 12, 2013 1:12 PM
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The Federal Insurance Office released its first annual report on June 12, 2013. While most of the report laid the groundwork for FIOs operations and outlined its many responsibilities, the section meant to relay the industry's current issues and emerging trends to President Obama gives insurers a chance to see the regulator's take on topics relevant to everyone in the industry. The following are the main takeaways from the section.
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1. Impact of Low Interest Rates
The sustained low interest environment is described, particularly its effects on life and health insurers and the means available to offset those effects. Among these, the report noted the temptation for life insurers to "reach for yield" with their investments and offer products with much more tenuous risk management. Other options for adapting to the ongoing low interest rates, included subject to regulatory and competitive limitations increasing premiums and fees, or changing the terms of minimum guaranty provisions in life and annuity products, as well as turning to derivatives to hedge interest rate risk. However, the report notes, the costs of hedging "may offset much of the expected returns and subject life/health insurers to counterparty credit risks."
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2. Natural Catastrophes
"In some cases, recognizing the possibility that insurance supply may be limited in catastrophe-prone areas, states have responded by creating public insurance programs or reinsurance entities to restore or support private markets. States with residual market mechanisms may have to strike a careful balance between insurer capital requirements, public support for the cost of market backstops, risk-justified rates, and affordable insurance." The FIO also acknowledged its commitment, as per the Biggert-Waters Flood Insurance Reform Act, to submit a report to Congress assessing such moves related to natural catastrophes and insurance.
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3. Changing Demographics
The shortest entry among the issues raised in the FIO's report, a couple risks and opportunities are briefly mentioned. For example, liabilities on lifetime annuity contracts may exceed the underlying assumptions in effect when annuity products were priced and sold. Yet, moving forward, insurers have an opportunity to adjust their product portfolio with alternative lifetime-income solutions that would protect any potential retirement gaps. However, the report noted the potential difficulties of developing and launching new products given the low interest rate environment, tax rules, and "the nature and extent of regulatory approval processes that apply in multiple states over product design and pricing."
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4. Growth Opportunities in Emerging Markets
The report outlines the rapid growth of the global insurance market, making the claims that "the size of the middle class in the emerging markets of Asia and Latin America is expected to grow and likely to exceed that of the United States." And, citing statistics from the Organization for Economic Cooperation and Development, says "by 2030, the U.S. market share will fall to seven percent globally, taking a distant third place behind India (23 percent) and China (18 percent)." It goes on to cite many more statistics foretelling a boom of insurance business resulting from a large-scale emergence of the middle class in the Asia/Pacific region, in particular. All of which underlines the importance of the FIO's efforts as the U.S. representative on the International Association of Insurance Supervisors.