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Trends, Challenges & Opportunities in the L/H Insurance Industry

Trends, Challenges & Opportunities in the L/H Insurance Industry Insurance Information Institute May 12, 2008 Steven N. Weisbart, Ph.D., CLU, Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038

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Trends, Challenges & Opportunities in the L/H Insurance Industry

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  1. Trends, Challenges & Opportunities in theL/H Insurance Industry Insurance Information Institute May 12, 2008 Steven N. Weisbart, Ph.D., CLU, Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5540 Fax: (212) 732-1916 stevenw@iii.org  www.iii.org

  2. Presentation Outline • What Forces Drive the Life/Health Insurance Industry? • Profitability • Premium Growth • Investments • Capacity • Catastrophic Loss – An Avian Flu Pandemic? • Regulatory and Legislative Environment • Q&A

  3. What Forces “Drive”the Life-HealthInsurance Industry?

  4. What Forces “Drive” theL/H Insurance Industry? • Broad Economic Forces • The U.S. Economy • Real (Inflation-adjusted) GDP • Inflation • General Price Increases and • Medical Care Cost Increases • About half from new therapies • Employment → Employee Benefit Plan Participation • Increased Cost-Shifting to Employees • Unemployment Rate → Lapses?

  5. Real GDP Growth,* 2000-2009F Slow economic growth is forecast for 2008 March 2001-November 2001 recession Recession? *Yellow bars are Forecasts. Source: Blue Chip Economic Indicators, Vol. 33, No 3 (March 10, 2008), pp. 2-3.

  6. Inflation Rate (CPI-U, %),1990 – 2009F Inflation was just 2.2% in 2007 but is accelerating. *12-month change March 2008 vs. March 2007 Sources: US Bureau of Labor Statistics (historical rates); Blue Chip Economic Indicators, Mar. 10, 2008 (forecasts); Ins. Info. Institute.

  7. Real National Health Spending Per Capita is Projected to Increase Rapidly Through 2015 Actual Projected Real Per Capita Spending is Projected to Grow at an Annual Rate of 6.4% through 2015 Calendar Year Sources: CMS, Office of the Actuary, National Health Statistics Group; I.I.I. interpolations.

  8. Nonfarm Employment Dropped in Connection with Each of the Last Three Recessions July 1981-November 1982 recession July 1990-March 1991 recession March 2001-November 2001 recession *preliminarySources: for history, http://www.bls.gov/ces/ ; for March 2008, www.bls.gov/news.release/empsit.nr0.htm

  9. U.S. Unemployment Rate: Recent Quarterly History and Forecast A rising unemployment rate could increase the policy lapse rate and make new sales more difficult, but it could also show why flexible life insurance policies are valuable Sources: Blue Chip Economic Indicators (3/07 and 3/08); Insurance Info. Inst.

  10. What Forces “Drive” theL/H Insurance Industry? (cont’d) • Broad Economic • Financial Markets • Level/direction of long-term interest rates • Volatility (direction?) of stock market prices

  11. Annual Average Interest Rateof 10-Year U.S. Treasury Note *As of April 18, 2008, from http://www.bloomberg.com/markets/rates/index.htmlSource: http://federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt

  12. The Most Recent Five Years of the S&P 500: Does Anyone Remember 2000-2002? From about 1500 in March 2000 the S&P dropped to about 800 in September 2002. ** ** ** ** ** ** **

  13. The Stock Market Became Much More Volatile Nearly 10 Months Ago July 19, 2007 May 12, 2003 (Index starts)

  14. What Forces “Drive” theL/H Insurance Industry? (cont’d) • Demographic • Changes in the composition of the U.S. population • Aging of the “baby boom” generation will contribute to rising health care expenditures, health insurance costs • But CBO says this will have a small effect on medical expenses in the short run • Decreases in death rates should make life insurance cheaper, annuities more valuable • Changes in buying preferences • Buying through the workplace? • Internet communities?

  15. Trends in Life Insurance Ownership, 1960-2004 Source: Cheryl Retzloff, Trends in Life Insurance Ownership Among U.S. Individuals, LIMRA International, 2005.

  16. Quarterly Change (vs. same quarter in prior year) in Applications for Individual U.S. Life Insurance Policies, 1999-2007 Effect of anticipated rate rise from increased reserve requirement for some term policies (“XXX” regulation) 9/11 effect 21 straight quarters of fewer applications than the year-earlier quarter; down again so far in 2008 Source: MIB Life Index, Annual Reports for 2001, 2002, and 2003, plus monthly releases

  17. What Forces “Drive”the Industry? (cont’d) • Financial Services Marketplace Conditions • Life-Health Insurance Industry • New Products & Services from Banks, Mutual Funds, Retailers? • Political Environment • Health insurance “reform” • Millions fewer uninsured? • New requirements to control insurer “overhead”? • Social security/Medicare “fixes” • Will benefit cutbacks create opportunities for supplemental private insurance? • Will new taxes compete for dollars that might otherwise go to private insurance?

  18. Under “Intermediate” Assumptions,Social Security Retirement and Disability Cost Will Exceed Income in 2017 Net Income/Outgo(Billions) The Intermediate (green) Assumptions are considered Most Probable. Source: 2008 Annual Report of the Trustees of the OASDI Trust Funds, p. 190-1

  19. Under “Intermediate” Assumptions,Social Security Medicare (Part A) CostIs Currently Greater Than Income Net Income/Outgo(Billions) The Intermediate (green) Assumptions are considered Most Probable. Source: 2008 Annual Report of the Trustees of the OASDI Trust Funds, p. 190-1

  20. What Forces “Drive”the Industry? (cont’d) • Regulatory Environment • Market conduct regulation • Suitability • Secondary market for life insurance • Accounting regulation • Technology/Culture • Use of the Internet • Will insurance-buying incorporate scenarios, “Monte Carlo” risk calculations for death, longevity? • Will the internet affect product development? Claims processing? • Retirement planning • Will a retirement planning “craze” sweep the country?

  21. How Mightthe EconomyAffect L/H Insurers?

  22. Do Policy Loans Increase During/ Following a Recession? Yes. Billions Billions July 1990-March 1991 recession July 1981-November 1982 recession March 2001-November 2001 recession Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2007, p. 21.

  23. Ordinary Life Insurance Lapse Rates, 1996-2006 March 2001-November 2001 recession. Was the spike recession-related? Sources: NAIC Annual Statements, p. 26 line 15, from National Underwriter HighlineData.

  24. What’s Being Done to Fix the Economy? Impacts on Insurers

  25. What’s Being Done to Fix the Economy? Impacts on Insurers(cont’d)

  26. Summary of Economic Risks and Implications for Insurers

  27. L-H IndustryProfitability

  28. L/H Industry Net Income, 1995-2006 2006 net income rose only 0.8% despite 10.5% net premium growth, because surrenders grew 20.4%, disability benefits grew 21.6%, and total expenses grew 13.1%. The 1995-2006 compound average annual net income growth rate was 9.3%. Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData.

  29. U.S. GDP vs. L/H Industry Net Income: Fairly Strong Association Billions Billions Realized capital losses: $4.8 billion in 2001 and $15.5 billion in 2002. Sources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via Highline Data.

  30. ROE: L/H Generally Above P/C Insurers but Below Fortune 500 Source: Insurance Information Institute; Fortune. 2007 insurer data are for stock insurers only.

  31. Sources of U.S. Life Insurance Industry Profits, 2006 32% 38% 26% Source: NAIC Annual Statements, p. 6, from National Underwriter HighlineData.

  32. L-H PremiumGrowth

  33. Individual Life Insurance Product Trends, 1976-2006E Term share would be larger if term premiums hadn’t come down so much Rise in UL market share caused by STOLI activity? “No lapse” guarantees? Indexed UL? Product Market Share, by Annualized Premium* Source: LIMRA. *LIMRA’s annualized premium calculation includes 10% of single premiums but excludes (a) excess (dump-in) premiums on universal and variable universal life plans and (b) large-case corporate-owned life insurance.

  34. Life Insurance & Annuity US Market Concentration, by HHI The US Department of Justice, which uses HHI to help decide which proposed mergers might seriously lessen competition, considers a market too concentrated if the HHI is over 1800. Sources: NAIC Market Share Reports 2003, 2005, 2006; I.I.I. calculations.

  35. U.S. GDP vs. Life InsurancePremiums: Fairly Strong Association Billions July 1990-March 1991 recession Billions July 1981-November 1982 recession March 2001-November 2001 recession Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2007, p. 40, and Fact Book2002, p. 60.

  36. U.S. GDP vs. Annuity Premiums:Fairly Strong Association Billions Billions U.S. T-Note Interest Rates over 10% from 1980-1984. “Recodification”: certain deposit-type funds excluded. Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2007, p. 40, and Fact Book2002, p. 60.

  37. U.S. GDP vs. Health Insurance Premiums: Fairly Strong Association Billions Billions July 1990-March 1991 recession July 1981-November 1982 recession March 2001-November 2001 recession Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2007, p. 40, and Fact Book2002, p. 60.

  38. Group Insurance Premiums Have Generally Grown Faster than Nonfarm Employment Source: ACLI Life Insurers Fact Book, 2007, pp. 40-1; http://www.bls.gov/ces/

  39. Source: Accuquote; Insurance Information Institute Forecast for 2008. Historical and Forecast Term Life Insurance Rates $500,000 20-year level term issued to 40-year-old male nonsmoker On average in 2008, premium rates for term life insurance are expected to fall 1% from rates in 2007

  40. Medical Expense Premiums Have Grown Much Faster Than Wages or Inflation Data are for Spring to Spring of each year, for a family of 4. Average premium is weighted by covered workers. Shift to HD plans might slow rate of increase. Source: Kaiser Family Foundation, Employer Health Benefits 2007 Annual Survey, Exhibit A.

  41. Reliance on 1st-year and Single Premiums, by Line of Business, 2006 Individual Life Insurance Individual Annuities 41 Source: Sources: NAIC Annual Statements, from National Underwriter HighlineData; I.I.I. calculations.

  42. Individual Annuity Sales, 1999-2007 $ Billions Fixed annuity sales doubled from 2000 to 2002 but have faded steadily since then. Variable sales dropped after the stock market plunge in 2000 but recovered by 2004. 2006 was a record year, up 17%. 2007 was up 15% over 2006. Source: LIMRA International, as reported in National Underwriter, L&H, March 24, 2008, p. 8.

  43. Room for Growth if Boomers Progress Toward Retirement Savings Goals Source: MetLife Employee Benefits Trends Study (2006)

  44. Quarterly Labor Force Participation Rate, Ages 65-69, 1998-2008 The labor force participation rate for workers 65-69 has grown considerably since 1998. It might grow even faster in the future as seniors find they can’t fully retire on their meager retirement savings. People born 1939-1943 Labor Force participation rate People born 1929-1933 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

  45. Quarterly Labor Force Participation Rate, Ages 70-74, 1998-2008 People born 1934-1938 The labor force participation rate for workers 70-74 has also grown considerably—by about 50%—since 1998. It too might grow even faster in the future as seniors find they can’t fully retire on their meager retirement savings. Labor Force participation rate People born 1924-1928 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

  46. Quarterly Labor Force Participation Rate, Ages 75 and Over, 1998-2008 People born 1933 and earlier The labor force participation rate for workers 75 and over has grown slowly in absolute terms—but relatively by about 50%—since 1998. Labor Force participation rate People born 1923 and earlier Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

  47. Investments

  48. Life Insurance Industry FinancialAssets, by Asset Class, 2006 The pie chart shows only general account assets. Separate account assets, mostly in stocks, in 2006 totaled $1.71 trillion. Sources: NAIC Annual Statements, via National Underwriter HighlineData; I.I.I. calculations

  49. L/H Net Rate on General Account Assets Tends to Follow 10-Year US T-Note This is unlikely to increase any time soon. *As of April 18, 2008, from http://www.bloomberg.com/markets/rates/index.htmlSources: ACLI Life Insurers Fact Book 2007, p. 43; http://federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt

  50. Effect of Capital Gains & Losses on Net Income, 1995-2006 Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses)from Highline National Underwriter

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