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Fear of ‘Next Bubble’ Challenges Life, Annuity Carriers

Doug French | December 07, 2015

During the summer of 2015, EY interviewed executives at approximately 20 leading US insurance manufacturers, distributors, and reinsurers as part of an ongoing effort to understand how the life insurance and annuity industry can surmount current challenges and move forward. 

(This article is part 1 of a series related to key findings from EY’s 2015 Retail Life Insurance and Annuity Executive Survey)

The objective was to understand the views and concerns in the eyes of industry executives and stakeholders and to outline the industry opportunities and challenges from the perspectives of customers, distributors and manufacturers. The interviews focused on the global economy, innovation, distribution, talent issues and consumer protection. This is the first article in a five part series, where we will walk through our key findings.

Ongoing Macroeconomic Sluggishness.

In the aftermath of the global financial crisis, insurance executives are justifiably worried about macroeconomic trends and the prospect of slow growth. As a whole, the global economy is still struggling to gain momentum. Global growth in 2014 was lower than initially expected, according to the World Bank. Overall, it is expected to rise moderately to 2.8 percent in 2015, and average about 3.2 percent through 2017.

Although the United States and the United Kingdom are showing improvement, the global outlook remains questionable. Negative interest rates and devalued currencies trouble some major economies. Financial malaise lingers in Europe and Japan. China is undertaking a cautiously managed slow down.

Equity markets are highly volatile and there is a widespread fear of “the next bubble,” such as an emerging debt crisis in the U.S. Few respondents believe that an uptick in the U.S. economy will restore growth for the life insurance and annuity industry or lead to broad improvements globally.

It is not surprising that retail life and annuity executives express concern about the full range of macroeconomic indicators, given the industry’s sensitivity to many of these forces. Consider demographic trends. Japan is facing a 40 percent population decline in the next 40 years, with huge impacts on a wide range of industries, including insurance. In the U.S., we have a growing population, but the inability of the insurance industry to penetrate this growing market remains evident.

Stagnant wage growth, rising healthcare costs and increased health insurance premiums could crowd out potential share-of-wallet gains for insurers, as consumers feel they have less money for life insurance and retirement savings. These effects could hit the middle-market segment particularly hard. This group is currently underserved by the industry, according to nearly all respondents. At the same time, millennials are marrying later and thus postponing the purchase of life insurance, which means income protection and retirement planning products will likely need to play a larger role within insurers’ portfolios.

Low interest rates negatively impact earnings and reserves and some respondents felt that drove companies to look for alternative asset classes for yield. Others identified a heightened awareness for the detrimental impacts of rising interest rates.

As one respondent pointed out, “We have managers that have never experienced rising rates before, and consumers that have never had to deal with it.” For instance, a potentially huge debt refinancing crisis looms if interest rates rise. As loans are refinanced, consumers will have even less money to save for retirement or to purchase life insurance products.

Stagnant wage growth, rising healthcare costs and increased health insurance premiums could crowd out share-of-wallet for insurers.  In the face of these economic challenges, the industry must develop offerings that reflect the real-world needs of consumers, from affordable annuities for the middle market to more sophisticated life and health policies that leverage the Internet of Things. The bottom line is the global economy will be an obstacle to growth for insurers, until the return of broad-based prosperity and wealth creation. 

In looking forward, the respondents stressed the long-term view. Such a perspective recognizes the current environment reinforces the need for strategic risk-taking and continuing analysis of business models. Thus, many carriers are likely to experiment in different markets. Survey respondents also recognize the maturity of the industry makes it particularly sensitive to macroeconomic challenges. The bottom line is that a sluggish global economy will remain an obstacle to growth for life insurers and give C-suite leaders even less financial margin for error in the future.

What respondents are saying:

  • “The U.S. economy as a whole may perform well, but that doesn’t necessarily extend to the insurance industry.”
  • “Several players will continue to focus on penetrating the middle market (or experimenting with it), but we don't see a super expansion due to [American’s] nervousness around share of wallet and wage growth. “
  • “It’s not going to get easier. Margins will get tougher. More consolidation.”          
  • “We’ve been lucky in the sense that we haven’t had any shocks to [the economy], because I think it could unravel pretty easily.”
  • “We rely on the global economy to do well.”
  • “The penetration of life insurance in the US has decreased and our population has doubled.”
  • “The ability to change quickly is key in this environment.”              
  • “The biggest risk is geopolitical risk across countries. [There’s] nothing we can do about that.”

Doug French is the managing principal of the Insurance and Actuarial Advisory Services practice within Ernst & Young LLP in New York. He can be reached at The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP, the global EY organization or the Insurance Technology Association.

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