Health & Life Insurance Actuaries | Lewis & Ellis Inc.

Where will life insurance industry go next year?

Life Insurance and Annuities
by Scott Morrow
Fed to raise interest rates this year, could boost life insurers
Fed to raise interest rates this year, could boost life insurers

With 2014 rapidly closing in, it seems many experts are predicting that the life insurance industry could take steps forward over the coming 12 months, and the improvements could come in a number of ways. This might be music to the ears of those participating in the market, who may have been struggling even for most of 2013 when it comes to their bottom lines.

One decision from outside the industry that will have a major positive impact on life issuers is the fact that the Federal Reserve Board's decision to begin tapering its bond-buying activity - - which has served to depress interest rates for more than a year now - will likely come to an end in March of next year, according to a report from Life Health Pro. The first step in this process will see monthly bond purchases fall to $65 billion from the current $85 billion, and that, in turn, will cause interest rates to rise. Further, yields on five-year Treasury bonds will likely continue rising over the course of next year, before settling somewhere between 5 percent and 6 percent by 2018.

In addition, the "Volker Rule" aspect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is slated to go into effect in 2014, and will ban proprietary trading and reduce bank liquidity, the report said. That, in turn, could be good news for life insurers because they will be able to remain at least somewhat liquid during this time and could be able to provide additional resources to institutions which are suddenly less flexible.

Perhaps not all news is good news
However, not all the fallout from the decision to begin tapering the Fed's quantitative easing initiative will necessarily be positive for those participating in the life industry, the report said. For instance, asset prices and capital markets are likely to take a bit of a hit as a consequence.  One of the biggest drivers of asset prices, and thus inflation, is home prices, which during the past year have increased over 10%, but are likely to be significantly impacted by the Fed's taper decision.

Of course, much of a life insurer's success in the coming year will be contingent upon their ability to continue connecting with consumers who are once again becoming more interested in their product offerings.  The rise in interest rates should make it easier to attract new policyholders to interest sensitive insurance products currently sold by insurance companies.



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