A report just out from Moody’s on the global life insurance market has downgraded the sector for 2017 from Stable to Negative. (1) The historically low interest rate environment is cited as a main reason. Moody’s acknowledges the “post-U.S. election bump in yields” we have seen after Donald Trump’s victory, but still believes the low rates will continue “to depress the sector’s investment returns and profitability.” While interest rates may be pushing slightly higher, rates credited to policies take a longer time to turn around, a fact we acknowledged over two years ago (see: Turning the Battleship Around…An Update.) For Moody’s, the low rates are “the main driver for the outlook change to negative.”

Another consideration was the increased market volatility that could occur because of higher worldwide political risks and uncertainty in 2017. This could negatively affect carriers’ earnings and drive risk-averse clients to products containing higher guarantees, which demand larger and costlier reserves. Increased regulation and higher reserve requirements were other factors affecting the rating downgrade.

The low interest rate environment also drives carriers to chase higher returns in illiquid and alternative investments, as well as equities. While these asset classes may bring higher returns, they pose more risk than the fixed investments that make up the bulk of a carrier’s portfolio.

The United States, Japan, the United Kingdom, Germany and the Netherlands were among the specific countries Moody’s cited as earning a Negative grade.

In another report out this year, EY believes “stagnant growth and lingering low interest rates” mean the life insurance sector “faces a challenging future,” but points out some areas of change that might positively affect the industry. (2) These include “new thinking and cultural shifts,” especially in the area of innovation. The industry as a whole has been slow to modernize, and developers in other areas are beginning to creep into the life insurance space. These “disruptors” are providing applications and systems designed to improve the customer experience, while streamlining the life insurance process. Data-driven companies entering or in the marketplace, including ITM TwentyFirst, will change the way life insurance is underwritten, sold, and monitored. The report points out the “perception problem” of an industry with difficult to understand products that many believe are out of touch with today’s consumers and cites the need for “engaging and educating customers with media…that customers are comfortable with.” By adapting to the changing world, EY sees tremendous opportunity for innovative companies in the space.

The ITM TwentyFirst team of independent life insurance professionals helps to empower policy owners to make informed decisions and realize the full value of life insurance assets. We appreciate the opportunity to be a part of the state-of-the-art changes taking place in the evolution of life insurance and life insurance policy management.

  1. “Life Insurance – Global: 2017 Outlook – Low Interest Rates, Risk of High Volatility and Legislative Changes Turn Outlook to Negative,” Moody’s Investors Service, December 5, 2016
  2. “2016 Life Insurance and Annuity Executive Survey,” EY, 2016