How has COVID-19 impacted the bottom line for life and annuity sales?New market research from SwissRe, excerpted here from its May 2020 Quarterly report, which can be accessed here.
The deep recession caused by COVID-19, low interest rates, surging unemployment and financial market volatility will weaken life insurance premium growth in 2020. New sales of life insurance and annuity products is negatively affected by social distancing as agents are not able to meet new prospects and clients. Potential downgrades and possible defaults on fixed income investments can strain the capital position of insurers who had increased their exposure to lower rated and less liquid investment grade securities.
The risks to life insurers have increased and they will be challenged to maintain returns in 2020. In response to these developments, A.M. Best, Moody’s and Fitch revised their outlook of life insurance industry from stable to negative. Despite increasing risks, the capital position of the life insurance industry remains strong, and it should be able to overcome the difficult current environment.
Principle-based reserving (PBR) has become mandatory for all the life insurers starting January 1, 2020. Principal-based reserving is a significant departure from previous rule-based reserving as PBR requires insurers to combine company specific assumptions with rule-based calculations. Life insurers are also expected to use new 2017 CSO mortality tables for all new business.
Common Fiduciary Standard
In another development, the push towards a common fiduciary standard in the insurance industry continues. In February 2020, the NAIC introduced its version of fiduciary standards and the SEC is working on its own version of the best interest regulation which will be implemented in June 2020. The full impact of all these changes is not yet clear.
Life and health industry’s direct premiums written grew at 3.5% in 2019. The main highlight for 2019 was a significant pick up in the ordinary life business. After negative growth in 2018, the group life business rebounded in 2019 growing at 3.2%. Annuities lost their momentum from 2018 and grew much slower in 2019. Growth prospects for the L&H industry in 2020 are dampened by very low interest rates, slower economic growth and sales disruptions from social distancing. Ordinary life saw a surge in the second half of 2019 ahead of the implementation of new reserving requirements and the introduction of new mortality tables for new business. Direct premiums in the ordinary life business grew by a very strong 4.7% in 2019.
According to the LIMRA surveys, life insurance new business grew by 5% in 2019 boosted by 15% growth in the fourth quarter of 2019. The growth was driven by universal life which grew at 31% in fourth quarter and 9% for the full year. Variable life also had a strong fourth quarter. On the other hand, term life decelerated to 3% growth in 2019, down from 5% in 2018. The complete shutdown of the economy in the first half of 2020 and the disruption in distribution will have a huge negative impact on the sales in 2020, but the business is expected to start recovering in 2021.
- Life insurance industry faces increasing risks due to spread of COVID-19
- Unusually low interest rates and capital market volatility will put pressure on investment yields
- Downward rating migrations can strain the capital position of insurers
- Overall, life insurance industry remains well capitalized to withstand risks in current environment
Annuity sales growth decreased significantly in 2019 compared to the previous year (Table 1). After the courts struck down the DOL fiduciary rule, there was a surge in annuities which continued till first half of 2019 as sales caught up with the pent-up demand. After that annuity sales fell sharply in the second half of 2019. Individual annuities grew at double digits in first half of 2019 and slowed down in second half, growing at only 4.6% for the full year 2019.
Group annuities grew even slower at 1.3% in 2019. Overall, annuities grew at 3.0% in 2019. The low interest rates environment, volatility in equity markets and the disruptions to distribution due to closedowns in 2020 will hurt growth. Increase in invested assets and marginal decrease in the net invested income decreased investment yields to 4.4% in 2019 from 4.6% in 2018.
Net income increased by 18% in 2019, but the results reflect large reinsurance contracts in 2018 and the accounting more than an actual improvement in performance. Going forward, it will be difficult for life insurers to maintain yields and profitability in presence of low interest rates, volatile equity markets and high unemployment. The capital and surplus showed solid growth in 2019, increasing by USD 21 billion, which was mainly driven by unrealized capital gains. Overall, the industry is well capitalized to manage the negative impact of the COVID-19 recession.