With interest rates that seem forever stuck in low gear, a stagnant economy and new capital reserving requirements on the horizon, the outlook for the life insurance and annuity business would appear to be cloudy at best. Yet speakers at the “2012 Variable Annuity & Life Insurance Summit: Managing Risk in Volatile Times,” sponsored by S&P Dow Jones Indices, found some reasons to be optimistic.
First, there are some pretty compelling demographics as huge numbers of pre-retirees seek retirement income solutions like annuities, pointed out keynote speaker Bob Kerzner, president and CEO of LIMRA, right. “This market will be good for the next 20 to 40 years,” he said.
Further, after barely surviving the recent market crash, investors are more conservative. “They are more concerned about getting that check in the mailbox [regularly],” Kerzner said. “That bodes well for the industry.”
Nevertheless, Kerzner said the next decade will not be easy for the insurance industry, with muted growth potential. He predicted a slight uptick in mergers and acquisition activity and that ultimately the industry will have fewer players.
Kerzner further noted the increased scrutiny on insurers’ capital reserves by regulatory agencies. “Consumers will be hurt if regulators over-require us to hold capital,” he stated.
Next up was Eric Berg, managing director of RBC Capital Markets, who discussed why insurance stock prices remain low. “Why are stocks down?” he asked. “I really don’t know.”
Even though companies have undertaken several de-risking measures, the market, he said, seems “to be saying that life insurance has a bad aroma.” He speculated that could be because of concerns over SIFI, greater capital requirements and continued low interest rates.
In particular, there’s concern about the risk in variable annuities, with “anxiety” in the investment community that these products will come “to a bad end,” Berg said.
Yet like Kerzner, Berg reiterated that the demographics remain in the industry’s favor.
The rise of VOLs
Much of the risk associated with variable annuities stems from the guaranteed benefits that are proving popular with consumers but are now becoming problematic for carriers. During the event, several mentions were made of companies raising fees, cutting or switching benefits or leaving the market altogether in an attempt to deal with guaranteed benefit riders.
One way insurers are addressing that risk is through the increased use of volatility managed funds, or VOLs, in VAs. Essentially, these funds attempt to protect capital while hedging market volatility.
Ken Mungan, risk management practice leader at Milliman, attributed most of the angst now spreading throughout the VA space to older policies sold with a living benefit rider. Such contracts were underwritten without the hedging strategies available today. “Variable annuities are fundamentally different today than they were five years ago,” Mungan said.
Once those legacy contracts are cleared from the system, there will be an opportunity for new entrants to come into the market with a clean slate, he added.
Mungan also didn’t take quite a pessimistic view of low interest rates. “People adjust expectations,” he said.
Alan Grissom, vice president, insurance channel, S&P Dow Jones Indices, conceded that in some respects, VOLs restrict consumer choice. However, he added that having too many choices may not be in the customer’s best interest since the goal is to create a solid retirement income stream.
Insurance as a utility?
The event ended with a speech by Jim Benson, CEO of Benson Botsford LLC, a financial services investment company, and former CEO of John Hancock Life Insurance Co. He said that despite the challenges, he thought this “was a real encouraging day” as insurers are getting more “adult like” in their view of how the industry should operate going forward.
In particular, carriers are now utilizing their actuarial talent to provide guaranteed benefits at the correct, sustainable price, Benson stressed. Insurance company executives, he said, should focus on being long-term trustees of their policyholders’ future payouts instead of being short-term traders.
He concluded by saying that the life insurance business is perhaps not meant to be a high-growth industry. Rather, it should be viewed like utilities‑an industry that provides steady growth in a regulated environment.