The normally turbulence-free life insurance industry might want to buckle up, based on the warnings of a new research report. It traces some of the shockwaves still rippling outward from the sub-prime mortgage crisis, and presents a bevy of potential trouble spots.
“The Subprime Mortgage Crisis: A Crisis of Structure Finance and Its Effects on Insurers” warns of a range of potential concerns with regard to life insurers’ investments, but notably hits upon a simpler problem that’s already common for retailers and restaurants in the current economy: Consumers, feeling an economic pinch, will stop buying.
The report was released recently from LOMA, a sister company of Windsor, Conn.-based researcher LIMRA. One of the findings warned of possible drop-offs in demand for life insurance and annuities, a spike in policyholders borrowing against their policies or allowing them to lapse and even an increase in life insurance fraud.
“Job losses by major wage earners will produce negative consequences in all affected households,” the study’s executive summary reports.
However, LIMRA and LOMA spokesmen say the report shouldn’t be taken as a prediction.
“This is not a forecast but rather a possible consequence of the sub-prime issue, and really depends on how all that turns out,” LIMRA spokesman Howard Drescher wrote in an e-mail to Banker & Tradesman.
LIMRA’s own report on sales of life insurance and annuities sales for the year to date show life insurance sales are holding steady overall, but some products have stumbled in the first half of 2008 compared to 2007: Variable universal life, for example, is down 7 per-cent, while term life sales are down 2 percent. Universal life sales, on the other hand, are up 3 percent.
“It’s not a stellar year,” Drescher said. “But there’s nothing dramatic going on with these numbers.”
She’s Watching The Consumers
As for annuities, variable annuities have been down most of the year, with a 6 percent decline, but fixed annuities have been up made popular by favorable interest rates – they’re up by 39 percent this year.
Catherine Smith, CEO of U.S. insurance with ING, says the company is keeping a close eye on consumer behavior during the slumping economy – especially if that slump continues.
But so far, ING hasn’t seen any sagging demand. It might also be expected that more policyholders would be borrowing against their policies, Smith said, but the company also hasn’t noticed any uptick.
“If [the economy] got worse, or stayed down, that could change,” she said.
Raymond Guetner, a faculty member of Boston University’s Morin Center for Banking and Financial Law, said he’d be surprised if the sub-prime crisis and down economy caused the kind of disruptions posited in LOMA’s report.
Many policyholders are insured through their employers, and employers don’t often cut that benefit, he said. Individual purchasers are also likely to hang out, down economy or no.
“If I’m worried about my job, the last thing I’m going to do is let my life insurance go,” he said.
Other potential trouble spots covered in the LOMA report:
According to Goldman Sachs analysis, the prices of commercial real estate could take a nosedive through 2009, “causing losses of more than $180 billion for commercial mortgage lenders” – many of whom are life insurance companies.
