For as long as there has been life insurance, companies issuing life policies have sought to obtain as many policyholders as they possibly can. Simply put, that's how the business works. However, in recent weeks, life insurers have actually had to take a different tack, turning away a large and growing number of applicants due to fears around falling interest rates.
The reason for this is simple: Life insurers make much of their money by investing premiums into bonds, based on projections for long-term financial performance of those vehicles. But, according to MarketWatch, with the stock market taking a big hit and interest rates dropping due to the economic impact of the global coronavirus pandemic, those vehicles just aren't performing up to what insurers could have reasonably foreseen until a few months ago.
These circumstances have come together to create a situation in which many life insurers are far more reticent to underwrite new policies to people of a certain age, at the usual prices, or even altogether. But at the same time, there's plenty of data - both hard and anecdotal - to suggest the pandemic has more people thinking about their long-term financial planning, spurring an interest in obtaining life coverage at the exact time insurers are turning off the tap.
What's the impact for the industry?
This certainly doesn't apply to all such companies, but even those that are best prepared to weather the storm are dealing with unprecedented difficulties. Moreover, with about 1 in 4 working Americans losing their jobs in the wake of the outbreak - leading to tens of millions filing for unemployment - it looks like these difficulties are going to linger. Indeed, the latest projection for the life sector from Moody's notes that while the last few years of economic growth have positioned some companies for stability as COVID-19 issues wreak havoc, many more remain in a tenuous position, and it's likely that capital growth will be muted at best for the 2020 calendar year.
Manoj Jethani, Moody's vice president, added that this situation will likely prompt many companies in the industry to reconsider their long-term investment strategies, especially as the risk of people who are individually affected by the downturn must eschew their coverage and, more broadly, default risk increases for the entire financial sector.
While it's never easy to project economic performance - especially when downturns happen due to infectious disease outbreaks - most experts are confident that, even in a best-case scenario, interest rates won't rise appreciably in the near future. Kevin Singer, a Florida attorney and Certified Financial Planner, noted in the Palm Beach Post that this probably isn't good news for older Americans looking to bolster their financial planning in the near term, especially because insurers are often giving brokers and agents relatively short notice when they change plans for how policies can be sold - and to whom.
The big picture
Because of all these unfortunate circumstances coming together at an inopportune time, many life insurers have been forced to scramble, which somewhat underlies issues industry-wide, the Chicago Booth Review warned. Because of how they tend to operate, life insurers may be more uniquely exposed to financial risk at this time than companies in many other industries. This may be particularly true for companies that sell annuities.
A Chicago Booth examination of first-quarter performance for various sectors found that while the S&P 500 stepped back more than 33% during that time, and the S&P Financials Index slipped almost 43%, variable-annuity life insurers fell by more than 51%. Among the major industries examined, only the airline sector fared worse (dropping more than 62%). Given the popularity variable annuities have gained in recent years, plus the very nature of that type of financial product - which guarantees income - it's a major issue for the industry.
Data suggests more than a third of every dollar of liability life insurers held in 2015 were wrapped up in variable annuities, and that number has likely grown in the intervening years. Insurers will have to abide by the minimum-return guarantees despite the declining interest rates, and the fact that the low-rate environment will likely continue for months or more to come portends increased vulnerability that all involved in issuing them will simply have to weather.
With all this in mind, life insurers should proceed carefully as the pandemic continues, shifting strategies where appropriate and doing all they can to keep brokers and policyholders informed of any developments that will impact them going forward. Increased transparency and a nimble approach will likely prove an important difference-maker in these difficult times.