As we prepare for the interlude occasioned by the holiday season, we should reflect on a tumultuous year in the life insurance industry. Despite a government shutdown, another year of zero interest rates and a turbulent rollout of the federal health care exchange site, signs are clearly emerging about the future of an industry that is in motion.
For example, the federal government has now designated two large insurers for federal oversight: American International Group and Prudential Financial. Down the road, others will likely see the same. While actual federal regulation of the two firms won’t begin until 2015, the Federal Reserve Board has been actively serving as consolidated regulator for insurance companies with thrifts for at least a year, and while a number of insurers have downgraded their thrifts, those that actively lobbied against Fed regulation but retained their thrifts seem to have accepted the federal presence.
The Fed has also applied for membership in the International Association of Insurance Supervisors (IAIS) because it wants a hand in shaping regulations abroad for domestic insurance companies. Over the short-term, there is likely to be friction as the various state and federal regulatory agencies vie for influence in international insurance supervisory activities.
However, as time goes on, Fed involvement might facilitate U.S. insurance companies’ expansion into foreign markets as a means of accelerating growth. In other words, instead of a detriment, involvement of federal regulators in life/health insurance regulation might spur a greater role for insurers in both the domestic and international financial markets going forward.
As for interest rates, the Fed will likely move early in the new year to raise interest rates. That will create a tricky transition for U.S. insurers, but in the mid-term will certainly allow them to increase growth and make insurance products even more competitive in the domestic financial market.
Especially affected have been products sold with variable rates, and with guarantees. This was a key market before the Fed began lowering rates to deal with the severe economic downturn. As industry officials have pointed out, variable life insurance policies have lost favor as interest rates have declined, especially for older consumers, reducing their ability to increase the value of their policies. As a result, many have turned to exchange-traded funds as an alternative.
Continued enforcement actions by state insurance regulators and treasurers/unclaimed property officials are of deep concern. The industry is divided on how the issue should be handled. So are regulators. Some want to continue with the dual enforcement action, while others believe that enough is enough. The strongest concern of both industry and regulators is the impact of the probes on smaller insurers as investigations of large insurers and the ensuing penalties as the investigators turn their attention to the smaller players.
The goal is “fair and uniform” settlement practices established by regulators for companies to comply with, but how to achieve it in a reasonable period of time is of concern.
And, the issue of limits on inside buildup on insurance policies is not going away. In proposals released this month for increasing revenues, the staff of the Joint Committee on Taxation (JCT) estimated that taxing inside buildup used to reduce premiums in later years (as occurs with whole-life policies), or is paid out because of the death of the insured, could increase government revenues by $210 billion from 2014 through 2023. Currently, this income can escape taxation under the income tax. This would tax policyholders based on the investment income their accounts have realized, the same way mutual funds are taxed now.
The JCT argues this approach would make the tax treatment of investment income from life insurance and annuities match the treatment of income from bank accounts, taxable bonds and mutual funds.
In turn, the cash value from life insurance policies and recurring payments from annuities would be taxable only to the extent that accrued capital gains had not already been taxed, the JCT argues. Obviously, any revenue-raising proposal dealing with inside buildup will garner the utmost attention of everyone in the life insurance industry.
Signs are emerging as to the future of the insurance industry, but there are some red flags to which the industry must pay close attention. These include the ongoing vendetta on unclaimed property, where there appears to be no end to the tunnel. Also on the list is the recent proposal from the JCT that could dramatically affect the competitiveness of life insurance products — especially variable life — and annuities.
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