Life insurance in 2022: Is the outlook stable or unsteady?
The economic impact of 2020 and 2021 has seen economies around the world reeling from the fallouts of COVID-19. As wave after wave of new variants have struck, a state of constant emergency has become the new normal.
The effect this has had on insurance providers has been seismic, with supply chain disruptions in goods and services causing knock-on reverberations that have hit the man on the street hard.
It has also resulted in many companies swiftly embracing new digital technologies and partnering with insurtechs to enable continued customer servicing throughout lockdown scenarios.
Coupled with this, average household incomes have fallen, and with that, spending on non-critical outlays, such as life insurance policies, have been reigned in. However, experts believe that 2022 looks set to bring some much-needed stability back to the global economy - and the Life insurance industry will undergo a number of positive changes.
Recently, Laura Bazer, the VP of the leading US investment hub Moody's, said of the situation, “COVID-19’s highly contagious delta variant, together with supply chain disruptions in goods and services, slowed the pace of the US economic recovery in 2021. But these supply chain imbalances will likely be corrected in the next two to three quarters, helping to solidify an already durable economic recovery.”
While she went on to say that further variants could still derail the insurance industry, by way of global economic impact, she also pointed out that data shows there is still much to be positive about.
Regulators and better legislation
The pandemic has accelerated digital transformation, which has had a knock-on effect for insurtechs. With all-digital operatives now in demand from both B2B and B2C customers, new regulations have helped to mature the industry and provide a better framework for companies moving forward.
In the US, Life insurers face a host of new rules, including government, state, regulatory, and accounting rules, with mixed credit implications. New National Association of Insurance Commissioners fairness guidelines have also been put into place to protect policyholders in the event that the company is using AI to gather data.
The impact of inflation on insurers
While the very word ‘inflation’ strikes fear into almost every business person globally, inflation for the insurance industry can, in some ways, have a positive impact - as long as it's a modest rise. Inflation in the US market has been at 6.2% for the last 12 months, and has risen faster and stayed longer than expected, especially given that 10-year Treasury rates reached over 1.7% this spring. The Federal Reserve is also likely to raise in 2023. However, inflation for Life insurers can result in improved investment yields, spreads on annuities, and a boost in sales.
According to one report by ING, interest rates will impact the following for insurers;
- Mortgages: With no penalising duration factor, these limited risk investments attract relatively low capital charges, providing insurers with an opportunity to invest in an amortising asset class with a natural interest rate hedge.
- Private placements: Bespoke products that match the exact needs of both issuer and investor are relatively low risk and can provide insurers with a perfect match for their portfolio on relatively attractive terms.
- Infrastructure debt: Characterised by a long duration, the SCR treatment compensates investors for the absence of a secondary market with a robust illiquidity premium. It can also provide sustainability factors.
Demand for better digital services
Customer demand for digitally-driven services that can be swiftly arranged with low-cost premiums is at an all-time high. However, the US Life insurance industry is still heavily reliant on health care assessments and tests, and the protection gap has widened since 2020. Many agents are still mainly marketing their products to mid-to-high earning households, and not offering products that could be of use to families in lower-income brackets.
As the insurance industry transforms, offering low-cost, swiftly-arranged protection for other sectors, such as P&C and the auto industry, many reports suggest the Life insurance sector is struggling to catch up. In the UK, digital insurers offering low-cost cover are reaping rewards and growing at scale. But changes in the US sectors are taking longer to happen. The next two years will most likely be transformative to the space as attempts are made to address the increasing demands from customers.
More mergers and acquisitions
The digital ecosystem of the insurance industry is moving from strength to strength, with more partnerships and collaborations expected to be forged over the next 12 months and beyond. The boom has accelerated the US Life insurance transformation and increased investment liquidity in the marketplace. The more mergers and acquisitions that happen, the better disposed traditional insurers will be to cater to the new digital demands customers are clamouring for. However, while more mergers and acquisitions are healthy for sellers, they can have a negative impact on policyholders, who may face greater credit risk than they started with.
ESG will provide new investment opportunities
With ESG taking centre stage in the lead up to 2030 and net-zero, insurance companies have more opportunities to tap into the green market, via investment drives, and by adopting new processes that reflect the need to reduce carbon emissions. But increasing their uptake of ESG, insurers will open more doors to potential investors, and therefore, the opportunity to scale in a manner that reflects their concern for the environment.
In the insurtech market particularly, although investment has increased massively over the past 24 months, the capital has not been evenly spread among startups, and much of it has been allocated through what is now termed as ‘super rounds.
More focus on ESG directives will bring greater opportunities for smaller operators to attract the interest of larger investors over the coming months.