How To Avoid Life Insurance Fraud
June 7, 2022 by Press Release
Inflation, exacerbated by the military conflict in Ukraine, and countered by Federal Reserve Bank monetary tightening, has been pushing up interest rates, particularly the last few months. Moody’s Investor Service reports inflation and rising interest rates are a benefit for life insurers, whose bond yields and investment income are rising, and whose spread-based product margins are widening.
Wage inflation from the US tight labor market has been another benefit, boosting life insurance purchases, with help from pent-up demand.
On the negative side, inflation is weighing on bond and equity valuations, which, under Moody’s baseline economic scenario, will pressure economic growth this year. For life insurers, however, Moody’s said the benefits of current inflation levels outweigh the negatives for now, as follows.
Rising tides raise all ships. With roughly 70% of their investments in fixed income securities and 10-year Treasury yields now in the 2.5%-3% range (vs. 0%- 1% in early 2020), life insurers are starting to see their net investment income rise, particularly with Federal Reserve monetary tightening in the last several months. Guaranteed, spread-based, and long-tailed products, like fixed annuities and long-term care (LTC), are particular beneficiaries of rising interest rates, as are sales.
Wage inflation is boosting insurance purchases. A tight labor market, with higher salaries and pandemic-related demand, has led to increased consumer insurance spending, particularly in group benefit and retirement products. However, purchases driven solely by pent-up demand are likely to subside over time. In addition, rising wage costs lower the profitability of certain insurance products (for example, higher home health provider costs in long-term care -LTC).
Inflationary fears have sent the equity and bond values reeling. Investor concerns over uncontrolled inflation and the risk of a recession have led to a drop in equity values and bond prices since the beginning of 2022. This has hurt the profitability of equity market-based variable annuities (VAs) and retirement-savings plans, among other products, while lower unrealized bond gains reduce GAAP shareholders’ equity and liquidity.
An inflationary spike and stagflation would both be credit negative. A sharp, persistent spike in long-term bond yields (for example, over 300 basis points) could precipitate elevated policy surrenders of interest-sensitive life insurance and annuity contracts out of their surrender charge periods, pressuring liquidity and regulatory capital. Stagflation, which is inflation plus a recessionary environment, would also hurt insurers, reversing sales and revenue growth and earnings expansion, and heightening default and credit risk.
