Divining the Future of the Life/Annuity Industry

Chicago — It’s not news to anyone that the financial services industry has been hit hard, and life insurers are not exempt. Many analysts and consultants have announced their research and predictions of when insurers will see better days and thoughts on what it means to technology spend. The latest comes from Conning Research & Consulting Inc., which states while some long-term trends look favorable for the life insurance industry, short-term challenges will occupy the attention of senior management for the next two to three years due to the impact of the financial crisis.

Conning’s projected results for 2008 indicate a drop in ending surplus, plus AVR (asset valuation reserve) of about $75 billion to $237 billion—a 24% decline from 2007.

“Insurers will be dealing with the challenges of 2009 and beyond in ways specific to their individual situations,” Terence Martin, VP, Insurance Research at Conning Research & Consulting tells INN. “Of course, there will be the issues of recapitalization and expense control, but in addition, we can expect changes in product mix and definition, and an increased emphasis on risk measurement and control. Consolidation will likely be an important driver in the near future as well, as stronger companies seize the opportunities that present themselves during these tumultuous times. The industry is already scale driven, and we will see stronger companies gaining market share and benefiting from their focus on asset management efficiency and expense control.”

Poor numbers might lead one to think IT spend will be down, but a recent report from Novarica says otherwise. “While many insurers are delaying or postponing IT initiatives, most of these are related to infrastructure or back-office functions,” says Matthew Josefowicz, director of insurance at Novarica and author of the study of 40 U.S. property/casualty and life/annuity insurers, across all sizes of companies and most lines of business. “Customer-facing systems and core capabilities that directly affect competitiveness are mostly going ahead.”

However, Josefowicz points out that the expectation of tougher times is affecting life/annuity insurers’ IT planning more than that of property/casualty insurers. “It’s likely the combination of poor investment performance, decreased demand due to market declines and shrinking consumer assets, and the brand hit that this “steady as a rock” industry has taken due to the widely publicized troubles at AIG, are adding to increased pressure on life/annuity insurers,” he says.

There is a great deal of volatility surrounding Conning’s projections for 2008 to 2010, according to Stephan Christiansen, director of research at Conning. "From the perspective of life insurers, the financial crisis began in earnest in the fourth quarter of 2008,” he says. “So some of these issues may affect 2008 results, while the effect of others may be delayed until 2009 or 2010, and the timing and impact will vary by company. That said, 2008 will be a watershed year, and we predict a significant consolidation of the industry."

Annuities may be one of the contributors to the life insurance industry’s low numbers. Variable annuity sales sank in 2008 as the stock market's swoon scared off investors, INN’s sister publication, American Banker reported earlier this week. As a result, insurers are raising prices and adding restrictions on the products. But sales of variable annuities should rebound once the stock market does, according to experts.

Industrywide, variable annuity sales fell from $48 billion in the fourth quarter of 2007 to $38 billion in the third quarter of 2008, according to the trade group Limra International. On the bank front, the Kehrer-Jackson Monthly Bank Annuity Sales Survey found that respondents sold $2.3 billion of variable annuities in October 2007, but just $1.3 billion in September 2008.

Var able annuity (VA) sales had soared in recent years by promising guaranteed income to throngs of baby boomers. Along the way, insurers waged an "arms race" of guarantees in order to gain market share, Matt Wion, senior actuarial adviser with Ernst & Young's insurance and actuarial advisory services practice, told American Banker.

But as the stock market's turmoil wore on in 2008, insurance companies began scaling back benefits and raising prices. One reason, experts say, was concern that losses on the annuities' underlying investments would prevent the insurers from following through on the guarantees within the products and their riders.

Companies, including AXA Equitable Life Insurance Co. and ING North America Insurance Corp., have increased fees and narrowed customers' choices for the underlying investments for products with guaranteed minimum-income benefits. Others have announced plans to redesign products.

On a positive note, fixed annuity sales have taken off. In September 2007, according to the Kehrer-Jackson report, fixed and variable sales were similar—$1.8 billion worth of fixed and $1.9 billion worth of variable annuities. By September 2008, sales of fixed annuities had surged to $2.9 billion, but sales of variables had dipped to $1.3 billion. Consumers have turned to fixed annuities as an alternative to certificates of deposit, whose interest rates have been less appealing, according to the American Banker article.

Conning says, viewed from the consumer’s perspective, personal budgets are tight and funding for long-term needs such as insurance protection and retirement may be sacrificed to meet more immediate needs.

In the long term, demographic trends, particularly the retirement of baby boomers, will increase the potential market for retirement products, long-term care insurance and wealth management products, according to Conning. The generations that follow, Generations X and Y, are entering the phase of their lives with the greatest insurance needs, and also will have the need to plan for their own retirement without defined benefit pension plans. Insurers will find significant opportunities if they reach out to these generations with innovative products and marketing methods.

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