‘Robust’ Life Insurance Industry Despite COVID, AM Best Reports

Despite the life insurance industry’s staid reputation, insurers deftly maneuvered to a vibrant and promising position during the pandemic, according to AM Best’s life/annuity annual market segment report.

The agency had set the life/annuity industry’s outlook as negative in March 2020 as the COVID-19 pandemic started. That rating remained until December when it was upgraded to stable.

“Contrary to initial expectations, many L/A companies attained record levels of capitalization, maintained strong liquidity and achieved improved earnings,” according to the report released on Friday. “Companies experienced both limited credit losses from the COVID-19 economic shutdown and robust sales of new business in both life and annuity products.”

Among the many factors affecting carrier performance, a key one was the shift from fixed to variable and indexed products. Fixed rate products have been suffering because persistent low interest rates have made it difficult for carriers to offer attractive products.

Annuity sales grew significantly in the first three quarters of 2021, up 19% over the prior year. Variable annuities soared for the first time since the 2008 crash spurred demand for fixed index annuities.

A robust equities market boosted traditional variable annuities, allowing carriers to offer VAs without the guarantees usually necessary to entice sales. But of course, registered index-linked annuities have been the rising stars of the annuity space as insurers try to break into the financial advising space with a product that boasts the magic mix of safety and equity exposure that fuels fixed index annuity marketing.

Interest Rates Still Vex

Low interest rates continue to be one of the biggest impediments for the life industry.

“The industry is still working through a historically low interest rate environment with inflationary headwinds that are causing a reversal in the loose monetary policies of prior years,” according to the report. “How this will impact the segment remains to be seen — rising rates are welcomed by L/A insurers but rapidly rising rates are not.”

As inflation ramps up to a 40-year high, the Federal Reserve was on track to raise interest rates faster and at higher increments, but the war in Ukraine might slow the Fed’s roll in its meeting next week. Fed Chairman Jerome Powell has signaled to Congress that the Fed will raise rates, but will it be a half or a quarter point? Bankrate reported that the current .25% Fed discount rate is expected to be raised to 2.5% eventually.

What’s New With Annuities?

Sellers of fixed annuities may be wondering where the love went as carriers court investment advisors and brokers. So they may be happy to hear about a promising new product – fixed index-linked annuities, or FILAs as opposed to RILAs.

The difference is that FILAs allow contract holders to expose some of the credited interest to market risk, but not the principal, taking it out of the purview of the Securities and Exchange Commission.

According to the report, FILAs offer better performance than fixed index annuities: “One of the drawbacks of regular FIAs has been that cap limits have generally been in the 3% to 4% range — some FILA contracts may earn almost double that.  Although only a handful of L/A insurers have begun selling this product, many insurers have been reviewing it and will likely begin offering it in 2022.”

Interest has been growing since last summer after F&G released what they said was the first FILA, the Dynamic Accumulator. The structure built on an FIA chassis allows contract holders to enjoy the RILA-like growth and the ability to switch to an FIA-like component on the contract anniversary so clients would not lose more than they gained in a down year.

F&G said the product meets an underserved need uncovered in a survey the company conducted, showing that 88% of respondents said 100% principal protection is important, with 86% saying the ability to shift the balance between upside potential and principal protection is also important.

Most innovations in annuities have been in the financial advisor and broker space, such as the announcement that BlackRock teamed with Brighthouse and Equitable Holdings for an annuity option in a new target-date retirement product for 401(k) plans, called LifePath Paycheck solution.

The AM Best report writers credited the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) with relaxing fiduciary standards and including a safe harbor provision to allow include income annuities in 401(k) plans: “With growing demand for retirement income solutions, AM Best expects to see more insurers offer these types of products in the future.”

AM Best’s survey found that nearly 60% of annuity and 40% of multi-line writers were expanding distribution into the financial planner and RIA space. As an example, the report pointed to Sammons’ acquisition of Beacon Capital Management, an RIA with more than $3 billion of assets under management.

“These relationships have helped companies integrate products into a more holistic financial planning process, rather than an isolated life insurance or annuity sale,” according to the report. “This also falls in line with L/A insurers’ focus on improving the customer experience, with more touchpoints and the hope of gaining a customer for life with potential cross-selling opportunities.”

Life Insurance Sales Perk Up

The combination of consumers becoming more aware of mortality and distributors adjusting to a remote work and sales environment helped accelerate sales in 2021.

[A potential wrinkle is a drop in life insurance applications reported by MIB this week. Applications decreased 3.8% year over year for the third consecutive down month, dropping activity to pre-pandemic levels.]

Variable life insurance was up last year, but fixed index products ramped up during 2021 and had a banner year end. The AM Best report cited LIMRA’s Third Quarter 2021 U.S. Retail Life Insurance Sales Survey, which showed life sales rose 18% for the highest growth in a quarter century.  Variable life products saw the strongest increases by far, driven by favorable equity markets, according to the report.

But fixed products had a good year with a boffo fourth quarter, according to Wink’s Sales & Market Report. Universal life sales were $861.5 million, up 20% compared to the third quarter and 16.25% over 4Q 2021.

Indexed universal and whole life sales led the way in the Wink report with their highest-ever quarter with $718 million, up more than 19.1% when compared with the previous quarter, and up more than 15.5% as compared to the year-ago quarter. The segment had its best year with $2.4 billion in sales.

Carriers would like to be able to sell more product directly to consumers. In an AM Best survey, 35% said direct-to-consumer was the channel most under consideration to develop.

The authors added that the direct-to-consumer channel typically used simplified life and health products, more than a third of individual life and annuity companies are considering it. Companies have tried going direct but often find that they need to include agents to help consumers, not only for legal reasons. The companies’ efforts to improve the digital process may smooth the way for direct-to-consumer, but they are also improving the client experience for agents.

“Many life insurance and annuity products are more complex and not as well suited for some of the digitized and streamlined processes as their health insurance and property/casualty counterparts,” according to the report. “L/A insurers, however, have made significant progress in this area, with many companies increasing the size of policies considered for automated underwriting — requiring a heavier reliance on enhanced data analytics and predictive modeling capabilities instead of medical exams. This trend will no doubt allow for an easier insurance application experience, and clients will very likely welcome the less invasive process.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].

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Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].