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Pandemic among various growth impediments, says US Life & Annuity Market Report

The stiff headwinds key business lines in the U.S. life and annuity industry faced early this year turned into a gale with the onset of COVID-19.

S&P Global Market Intelligence projects the industry will suffer a decline in direct premiums and considerations for only the fourth time in the past 17 years with broad-based pressure on life, annuity and accident and health business volumes that will not fully abate until 2022, according to the newly released 2020 U.S. Life and Annuity Insurance Market Report. We expect ordinary life direct premiums to fall in 2020 for the first time since 2009 when the industry was battling the effects of the global financial crisis, resulting not only from operational considerations associated with the pandemic but also the difficult top-line comparison the business confronted as 2020 began.

Click here to log into the Market Intelligence platform to read the full 2020 U.S. Life and Annuity Insurance Market Report and access data exhibits.

The report also projects an increase in the industry benefit ratio in 2020 and 2021 as the potential for excess mortality related directly or indirectly to the pandemic will offset the effects of sharply lower levels of utilization for various health-related services.

Insurers, citing sharply lower utilization rates, have begun to broaden the scope of premium credits beyond those business lines where access to services was either not permitted under state stay-at-home orders or greatly restricted by providers. Those actions are likely to create additional drag on top-line growth for the industry in both 2020 and 2021 due to statutory accounting guidance issued by the National Association of Insurance Commissioners as well as the manner in which some carriers have opted to provide premium relief.

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Life to languish

The NAIC's requirement for life insurers to shift to the 2017 Commissioners Standard Ordinary mortality tables from the 2001 standard for policies issued on or after Jan. 1, 2020, led to a dramatic acceleration in new business during the second half of 2019.

Growth in direct ordinary life premiums of 10.7% in the fourth quarter of 2019 represented the most rapid expansion in any period for the business line in 12 years, reflecting efforts by distributors to close sales before the introduction of new products that were expected to carry higher prices. The effects of the mortality table shift was uneven across the industry given that some carriers adopted the newer version well in advance of the NAIC's deadline.

For full year 2019, growth in direct ordinary life premiums of 5.4% marked the strongest recorded by the industry since at least 2000, exceeding the previous high-water mark of 4.9% set in 2004. Direct ordinary life first-year and single premiums surged by 11.9% in 2019, well ahead of the previous 18-year high of just under 8% set in 2010. The rate of growth in first-year and single premiums when weighting the latter at 10% was 7.3%, representing the highest result for the industry since 2011.

As total direct ordinary life premiums increased at the more pedestrian pace of 0.9% in the first quarter of 2020, production for that period fell on a sequential basis by 14.4%.

Our outlook for a decline of 2.5% in total direct ordinary life premiums in 2020 includes projected reductions in first-year and single premiums of 11.8% or 10% when assigning a 10% weight to the latter. An 11.8% drop in first-year and single premiums would represent the largest year-over-year decline in that metric since at least 2000. The largest declines since then had been 7.2% in 2008 and 8.7% in 2001, both of which hit the books at times the U.S. economy entered recessions. The U.S. economy entered a recession in February and the third-party macroeconomic forecasts that underpin our outlook project U.S. gross domestic product to decline by more than 4% in 2020.

The expected reduction in new business ascribes a certain amount of business from the fourth quarter of 2019 as excess production that will not be repeated in 2020 and takes into account logistical challenges associated with selling and underwriting life insurance in a work-from-home environment.

The overall rate of decline is considerably more modest given the importance of renewal business to total-filed ordinary life premiums. Renewals have consistently represented in excess of 70% of annual ordinary life premiums on a direct basis.

The potential for life policies to lapse is a significant risk to our forecast given the extent of the financial hardships some Americans are facing. But extraordinary actions taken voluntarily by life carriers and at the direction of regulators in certain states to place temporary moratoriums on policy cancellations for non-payment could mitigate what might otherwise have resulted from the financial shock triggered by the pandemic.

The most comparable situation from a societal and public health perspective likely was the 1918 Spanish Influenza pandemic. A variety of factors coalesced to produce outsized growth in life insurance sales after that pandemic dissipated. We expect sales to recover beginning in 2021, reflecting heightened consumer interest in life insurance products and an eventual easing of operational challenges, but not to the same extent as they did a century ago in large measure due to the dramatically increased size of the business today.

Annuity anguish

Year-over-year comparisons also present a formidable hurdle for the ordinary individual annuity business in 2020.

The first nine months of 2019 represented the tail end of a seven-quarter stretch of growth in direct ordinary individual annuity premiums and considerations that in part resulted from the removal of regulatory uncertainties associated with federal fiduciary rules. Comparisons became particularly challenging in the fourth quarter of 2019, leading to a 7.3% reduction in direct premiums and considerations on a year-over-year basis. While the onset of COVID-19 related restrictions generally did not play a significant role in business volumes for the first quarter of 2020, direct premiums and considerations fell by 4.9% for the period in a reflection of particularly strong business volume in the first quarter of 2019.

Operational and financial challenges should be much more visible in second-quarter results, and we do not expect that they will fully abate this year. S&P Global Market Intelligence projects a decline of 12.1% in first-year and single premiums as compared with expansion of 18.6% and 5.1% in 2018 and 2019, respectively. That projected result is in line with the forecast for a drop in U.S. individual annuity sales of between 8% and 15% issued by LIMRA's Secure Retirement Institute, which incorporates expectations for lower production of variable, fixed and fixed indexed annuities.

On a total-filed basis, including renewals, we project a decline of 10% in direct business in 2020. Our outlook for a decline in net business of more than double that pace reflects the potential effects of an increased amount of premiums being ceded to a non-U.S. reinsurer outside of the scope of our projections from a U.S. holder in a scenario we expect will unfold to at least some degree in Jackson National Life Insurance Co.'s $26.7 billion reinsurance transaction with Athene Holding Ltd. The ultra-low-rate environment may push other annuity writers to seek more efficient third-party solutions for portions of their in-force books.

Slower growth in accident and health

Our forecast for the U.S. life and annuity industry incorporates an outlook attributable to accident and health business lines written by life statutory statement filers.

Accident and health direct premiums have grown faster than the industry as a whole in five of the past seven years, including in 2019 when it expanded by 6.2%. We expect that trend to continue in 2020 with incremental expansion in accident and health business volumes compared to declines across the life and annuity lines. The projected growth of less than 0.4% would be the slowest for the business since 2011 as it contemplates a range of offsetting factors that include rate increases on medical plans implemented at the start of the year, declining employer payrolls, the expected accounting for policyholder credits in lines that have experienced unusually low levels of utilization as reductions in premium, and the potential rise in the number of individuals seeking government-sponsored healthcare coverage as levels of unemployment soar.

For 2021, we expect growth in accident and health premiums to lag the industry as a whole given actions taken by several carriers to push back plans for rate increases in lieu of premium credits, the likelihood that unemployment rates will remain elevated, and the potential for some financially strapped employers to cut back on employee benefits, among other factors.

Methodology

Historical results referenced in the report and this article are based on the aggregation of data at the line-of-business level reported by U.S.-domiciled entities that file life statement blanks with the NAIC. The analysis excludes in whole or in part results attributable to select entities with at least $100 million in direct premiums and considerations in one of the past three years where the vast majority of their business occurred outside the United States: CICA Life Insurance Co. of America, Assurant Inc.'s American Bankers Insurance Co. of Florida, MetLife Inc.'s American Life Insurance Co. (DE) and American Family Life Assurance Co. of Columbus (Aflac). Historical results for the Aflac Inc. entity are partially included for years prior to 2019 and fully included for 2019 because its Japanese business was assumed by a Japan-based affiliate effective April 1, 2018.

The outlook contains a particularly high level of risks and uncertainties pertaining to the pace and shape of the macroeconomic recovery, the duration of the low-interest rate environment and the potential for safe and effective COVID-19 treatments and vaccines to eventually emerge.


This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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