Life insurers were buoyed when Sen. Susan Collins, R-Maine, said she would support a legislative clarification to Sec. 171, her amendment to the Dodd-Frank Act, so that statutory accounting principles as the metrics used to evaluate insurance industry solvency effectively would be sustained. In other words, insurers appear to be comfortable with maintaining the insurance industry as it has existed for the last 150 years, keeping intact the so-called “Chinese wall” that makes the industry “unique.”
However, recent events lead me to challenge the long-term viability of such an approach. The industry has been losing market share consistently, especially to the brokerage and mutual fund industries, because growth in sale of money market funds and the soaring use of personal computers started a revolution in how financial products are distributed.
Moreover, throwing the Federal Reserve staff under the bus is not a wise idea; that is exactly what Collins’ appearance before the Senate Banking Committee did. The Fed didn’t ask to be designated the consolidated regulator of insurers which owned savings and loans. It came to the rescue of American International Group despite a legislative provision barring it from overseeing insurance holding companies. Essentially, it was thrust into a job it didn’t ask for, under the worst of circumstances, and it succeeded in keeping AIG intact although even internally there was doubt whether that could be accomplished.
The Collins amendment was her own idea, and the Fed was not asked for input before she introduced it, nor was any guidance provided that asked the Fed to treat insurers differently. The whole exercise of demanding that insurers be treated differently was a Monday morning quarterbacking, or politicians seeing a short-term political advantage in criticizing a government agency.
Other factoids also say it is time for life insurers to broaden their horizons and spend less time protecting a turf that keeps getting smaller. For example, the sole purpose of the Gramm-Leach-Bliley law was to reverse the impact of court decisions allowing banks to encroach upon insurers, especially their desire to sell variable annuities. However, the variable annuity market is shrinking. See the recent report by Moody’s Investors Service, which said variable annuities continue to negatively impact the balance sheets of large variable annuity players. And, a number of large players, like John Hancock and the Hartford, have exited the market.
There are a host of other reasons pointing to the need for life insurers to diversify. But there are two that stand out.
The first is that insurance analysts tout the fact that interest rates are going to rise, to the benefit of insurance companies. But no glide path to higher rates currently exists. It appears that the Obama administration will not be given any leeway to stimulate the economy, the likelihood of any major change through the November election is dismal, and the recent events in Ukraine are likely to lead to continued slow growth, at best, for key U.S. trade partners in Europe. Japan remains in trouble, and the United Kingdom is slipping. Central and South America are reeling because of low commodity prices prompted by the slowdown in the Chinese economy. So, when interest rates will rise significantly remains a key unknown.
Let’s face it: Annuities are not the only industry product under pressure. While the Camp proposal is virtually certain not to become law, key industry players are alarmed because the provisions further limiting the profitability and attractiveness of insurance products could come out of the closet quickly as a pay-for in the growing effort to reduce tax system complexity. And, the attractiveness of split dollar and Corporate-Owned-Life-Insurance has also declined.
So, facilitating diversity and acquisition of businesses classified more as financial services and less as insurance might be wise ideas for insurers looking to be survivors in a brutal economic environment where there is no rising tide to lift all boats.
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