Low Interest Rates Help Shape the Life Insurance Industry as the U.S. Reopens

Will low interest rates help shape the life insurance industry for years to come? The fallout from the COVID-19 pandemic effectively reshot the trajectories of the industry. The past year has ushered in key product and service trends that, at best, appeared in their infancies just a few years ago. Another more subversive development, however, will also help drive the industry for the foreseeable future: persistent low interest rates.

COVID-19 lockdowns brought on new, important trends in the life insurance industry

Accelerated underwriting and remote, digital applications currently stand among the most notable product and service trends. The NAIC is set to establish accelerated underwriting guidelines by 2022, and digital sales are ever more important to firms. These trends have enjoyed a central place in the wider discussion about the future of the life insurance industry over the past year. Though these trends may not be new, social distancing guidelines and other challenges posed by the pandemic have accelerated their adoption throughout the industry. Not only has the economic slowdown cause by lockdowns hastened industry adoption of accelerated underwriting and remote, digital onboarding. It has also brought about an environment of persistent low interest rates.

To be sure, the current low interest rate environment is not a new phenomenon. It kicked off as a result of the 2008 financial crisis. Although rates began climbing to pre-2008 levels between 2015 and 2019, these hikes were effectively wiped out by April 2020 as central banks sought to stave off recession by easing monetary policy. Now the U.S. economy is beginning to reopen on the heels of the national vaccine rollout. But the Federal Reserve has indicated it will hold rates at near zero through at least 2023, with some experts predicting no significant liftoff until as late as 2026.

Persistent low interest rates have forced firms to adapt by exiting certain lines of business

An extended period of low interest rates typically spells trouble for the life insurance industry. The spread between interest earned and interest credited becomes compressed. Firms often experience reduced net income, liquidity risk and portfolio revaluation. And they risk being unable to meet obligations to policyholders. The typical firm response to a persistent low interest rate environment can include decreasing guaranteed payouts on new business and abstaining from the sale of longer-duration products. Despite strong overall sale numbers for whole life insurance and structured deferred annuity products in 2021, Life Insurance Monitor has observed this sort of behavior throughout much of the industry just this year. Some firms partly or entirely shed their life insurance and annuity businesses:

• American Financial Group completed the sale of its entire life insurance and annuity businesses to MassMutual this quarter for $3.5 billion
• Blackstone acquired Allstate’s life insurance business this year in a deal worth $2.8 billion
• Assurant sold its preneed insurance arm to CUNA Mutual this year for $1.3 billion
• Principal will divest from most of its life insurance business and all of its fixed annuity business but has yet to disclose any information regarding potential buying firms or sale price

Some insurers have pivoted to offering index-linked products instead of fixed-rate guaranteed products

While some firms have sought to de-risk their financial portfolios by selling off certain lines of business, others continued to update and expand product offerings. For certain product types like registered index-linked annuities and term life insurance, sales numbers remained strong throughout 2020 and into 2021. In 2021, Life Insurance Monitor has observed a slew of market-linked product launches. As fixed-rate products can return significant losses for firms in a persistent low interest rate environment, many will seek to pivot more of their business to offering market-linked products to help de-risk their investment portfolios:

• Midland National launched the Strategic Accumulator Two IUL product
• John Hancock unveiled the Protection VUL product
• Lincoln Financial Group released the Lincoln VUL One and SVUL One products
• Prudential added two new index options for its FlexGuard IUL

As low interest rates help shape the life insurance industry, how will firms respond?

Throughout 2021 and beyond, the Life Insurance Monitor expects these trends to continue. Firms will adapt their businesses to meet the challenges posed by a persistent low interest rate environment. More firms will likely focus on offering market-linked and short-duration products while some other firms will keep exiting riskier or less profitable lines of business.