Examining the Life Insurance Exodus

The past year has presented significant financial challenges for the insurance industry. Currently, health insurers remain hamstrung by ongoing regulatory deadlock over the ACA while US P&C carriers have reported $53 billion in 2017 losses due to record level catastrophe events. Despite the aforementioned trials, it appears that life insurers have faced the greatest headwinds of all.

Over the course of the last 12 months, there has been a surge of life insurance business exits. This includes tenured players like Aetna, Hartford, Grange and Liberty Mutual. Unlike the health and P&C sectors, the market forces driving these departures date back nearly a decade and require a more nuanced explanation. Three key questions can help can help explain what the factors causing this mass exodus are and what it means for remaining life carriers moving ahead.

Why are so many life insurance carriers getting out of the insurance business?

There are a myriad of reasons, however the top three factors are decade-long low interest rates, unforeseen high costs of care, and waning consumer interest.
Life insurance companies have been hampered by nearly a decade of low interest rates as a result of the economic recession starting in December 2007.
Low interest rates

• Life insurance carriers are one of the largest purchasers of bonds and mortgages in the United States. These types of investments are repackaged into annuities and life insurance products that reflect the yields of the underlying investments. Due to these product models, interest rates have a direct impact on insurance companies, their new products, and pre-existing policies.
• Life insurance companies have been hampered by nearly a decade of low interest rates as a result of the economic recession starting in December 2007. In the 90s and early 2000s, life insurers made assumptions about what they expected interest rates to be in 2010 to present day. Using these assumptions, life insurers calculated payments and promised healthy returns to customers. Unfortunately, the assumptions made more than 20 years ago are falling short of economic reality. Some of the negative consequences insurers face as a result of low interest rates include:
  • Low interest rates have hurt the profitability of many types of life insurance as low rates depress the income insurers earn by investing customers’ premiums until claims are paid.
  • They also drive up the cost of hedging annuities’ lifetime-income guarantees.
  • Low rates have also made it difficult to attract new buyers looking to invest.

High cost of care (Long term care)

Many life insurance companies have offered long-term care plans as a part of their product line. Poor underwriting years ago has translated into significant losses and highly unpopular, well-publicized premium hikes over the past few years. The underwriting missed the mark for the following reasons:

• People are living much longer now than when many of the LTC policies were sold.
• Many of the policies written 15-20 years ago drastically underestimated how expensive medical care would become.
• Life insurers wrongly assumed a portion of customers would let policies lapse. For example, it was commonly assumed that five percent of policyholders would allow their policies to lapse annually. In fact, only approximately 1% of policyholders have done so.

Consumer Changes: Lower interest in buying policy

While there are notable exceptions, much of life insurance marketing and advising relies on old-fashioned methods, many of which fail to translate with younger audiences. This creates a vacuum in demand from direct buyers as well as from businesses when designing benefit offerings for employees. Today’s life insurers must contend with:

• Low product awareness
• Shifting priorities among younger consumers
  • Paying off student loans and credit cards
• Most employers are sticking to a lean strategy when it comes to benefits
  • Nearly one in four small employers are no longer offering life insurance — often considered the bedrock of the benefits package, along with major medical — to their employees

What impact has this had on the industry? What does this mean for life insurance companies moving forward?

Until interest rates fully rebound, the annuities business will be less competitive. Once rates bounce back, life insurers will likely shift resources back into those product lines. Meanwhile, many life insurance companies are reconfiguring their investment portfolios to focus on less capital intensive business lines such as retirement planning. In-force management is also increasingly recognized as an effective tool to improve profitability.

What do clients say they need/want from a life insurance policy? Do customers still see value in life insurance?

Mintel US research on life insurance points to an ongoing, demonstrable need for life insurance. Eighty-five percent of life insurance policyholders say they have life insurance to cover burial and other final expenses. Sixty-seven percent own a policy to help replace lost wages in the event of a death. Sixty-three percent of consumers indicate they have a policy as a means to transfer wealth or leave an inheritance.

These numbers show that independent of varying interest rates, business exits and other market fluctuations, consumers are still looking for savings and investment tools. From the young and unengaged to seniors seeking better long-term care solutions, life insurers’ real challenge ahead will be to create dynamic products that satisfy changing consumer needs.