Best Insurance stock - US life insurance industry forecast 2013 : The credit outlook for the U.S. life insurance industry is stable for 2013, reflecting the industry's strong balance sheet fundamentals and improved liquidity profile, according to Fitch Ratings.
These positive factors have somewhat mitigated Fitch's ongoing concerns over the challenging macroeconomic environment that continues to pressure operating fundamentals. While Fitch believes the industry is well positioned to withstand macroeconomic challenges over 2013, the outlook is vulnerable to severe, albeit unexpected shocks to the economy.
The 'fiscal cliff' and Eurozone debt crisis remain the predominant risk for the global economic and credit outlook, although Fitch's base case assumption is that policy makers will take necessary steps to avoid disorderly shocks.
Fitch expects that sustained low interest rates will limit earnings growth, but will not have a material negative effect on industry capital in 2013. The industry's exposure to an unexpected interest rate spike would raise concerns over disintermediation risk.
Fitch expects that if interest rates stay low much beyond 2014, the agency's outlook would likely be revised to negative based on weakened earnings profile and anticipated negative capital impacts.
Fitch also expects ongoing rationalization of products and markets resulting from the financial crisis to accelerate in 2013. Credit implications are likely negative over the near term due to potential capital charges, but could be favorable longer term. This rationalization process is creating increased opportunities for both traditional players and nontraditional players, which are expected to play an increasing role in the industry.
Ernst & Young - 2013 US life-annuity insurance outlook
The US life insurance industry is confronting significant demographic, macroeconomic and regulatory challenges to business models and operations. In 2013, successful players are repositioning and reinventing their products, strategies and services, positioning their companies for growth and profitability in the competitive, lower-margin market.
Insurers are competing in a market where average household expenditures on life insurance have declined 50% over the past decade, a decrease most noticeable among younger consumers. Product preferences for all consumers are also altering, given the prolonged low-interest-rate environment and equity market upheaval.
In response, US life insurers are transforming their products and businesses. Many are introducing novel products and enhancements that are attractive to consumers and profitable for insurers in the low-interest-rate environment. Carriers are leveraging technology to improve business models and product offerings, thus enhancing their value propositions to customers, while estructuring operations and distribution to communicate and transact with customers on their terms.
These positive developments are expected to continue in 2013, despite the persistent economic difficulties. Real Gross Domestic Product (GDP) is expected to grow only modestly between the fourth quarter of 2012 and the fourth quarter of 2013, although the unemployment rate could begin to improve during the year. Interest rates are likely to remain low, and equity markets are expected to be volatile. Insurers’ financial positions will be impacted by management and expense fee instability, Deferred Acquisition Cost (DAC)
write-downs, hedging losses and basis risk and reserves and capital adequacy.
The continuing volatility is causing reluctance among consumers with regard to purchasing variable products, and the low crediting rates on fixed products are not perceived as a particularly attractive alternative. Regulatory forces also challenge the industry. At the federal level, life insurers with banking operations, or those designated a Systemically Important Financial Institution (SIFI), confront possible increased regulation by the Federal Reserve to improve risk management. Life insurers also must prepare for possible actions taken by the new Consumer Financial Protection Bureau (CFPB), which reviews assorted financial services transactions like insurance sales.
Other pressures include emerging US and international accounting standards that may adversely affect business operations and business models. At the state level, life insurers continue to adapt to current and prospective National Association of Insurance Commissioners (NAIC) regulations, such as the Risk Management and Own Risk and Solvency Assessment Model Act, commonly called ORSA.
Within this economic environment, many companies are rethinking the businesses they are in and developing new ways to sustain a profitable, competitive advantage. Outsourcing and shared services, for instance, may reduce costs and improve efficiency, in addition to increased use of data analytics, mobility and digitization — the buzzwords of the moment. Indeed, operations and technology are increasingly the source of competitive advantage. In 2013, insurers should continue to address the changing regulatory environment by evaluating their product lines and markets. Improving capital and risk management still remains a priority, as does a continuing engagement with legislators to shape key tax policies.
To respond to these market forces during the coming year, senior management needs to:
• Rethink business strategy for sustainable competitive advantage
• Respond to consumer needs and changing distribution to grow
• Transform products to adapt to economic challenges by:
• Preparing for a scenario of long-term, low interest rates
• De-risking and redesigning products
• Harness big data for sustainable advantage
• Position the business for tax, regulatory and accounting change by:
• Staying attentive to tax changes in this time of governmental need for revenue
• Increasing focus on risk management and consumer protection to prepare for regulatory change
• Organizing and planning for accounting change
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