Citing the overall improvement in the financial condition of the industry and the economy,
The rating firm’s outlook for the life insurance sector was last revised in July 2010 to stable from negative. A.M. Best says the sector is benefiting from some macroeconomic headwinds and a rebound in investment income.
Moreover, the report says the industry has finally shaken the specter of the financial crisis. “Life/annuity companies have taken a number of measures as a result of the lessons learned from the financial crisis,” the report states. “Among the more notable actions taken are: greater focus on liquidity, both at the operating and holding company levels; increased focus on scenario generation and tail risks; reviews of product segments and corporate structures to determine core business lines; identification and quantification of risk appetite in terms of product, investment and operational risk; and review of risk-adjusted capital levels.”
Despite this, the report says life insurers have reason to temper their optimism including continuing risk in real estate linked assets. “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.”
Given its substantial exposure to interest-sensitive products such as fixed annuities, the industry is also sensitive to swings in interest rates. “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),” the report states.
Additionally, A.M. Best notes that life insurers are in an increasingly competitive environment and will continue to face stiff competition from other financial institutions for baby boomers’ retirement savings funds.
