North American life insurers, despite having sound financial foundations, are susceptible to external circumstances that could dampen their economic outlook and hinder their overall financial health.
According to a Standard & Poor’s Rating Services’ report titled, North American Life Insurers Have Strong Balance Sheets, But Macroeconomic Headwinds Linger, the industry faces many challenges over the next year, most of which are out of their immediate control.
Standard & Poor’s foresee slow growth and a weak global economy in the coming year. Coupled with low interest rates, at least through 2014, and strong competition amongst carriers, insurers can expect to see limited revenue growth that will impede the potential for higher operating margins.
Because many blocks of business are already close to or at their guaranteed minimum interest rates, insurers could see their net interest margins cut into.
As a result of the low interest rate environment and preserve investment yields, insurers are looking at less-liquid and often times riskier asset classes such as commercial mortgage loans, private placement bonds and other alternative assets. The yields, however, have been modest so far so this migration may not become standardized.
And, the fiscal cliff may not just affect life insurance products’ attractiveness due to a potential loss of tax-favored status, the brinkmanship in Washington is also working to conceivably reverse gains that insurers have realized in equity market advances that have boosted separate account balances and asset-backed fees.
“Although insurers remain well capitalized, broader economic risks could cause downgrades to outpace upgrades over the next year,”according to Standard & Poor’credit analyst Matt Carroll.