S&P Looks at 2011

Standard & Poor’s Corp., New York, is reporting that 2011 will be a year for more optimism in the insurance industry, although not exuberant optimism.
The rating agency offered its assessment of different insurance sectors in commentaries released earlier this month. S&P’s take on 2011 is as follows:

Life Insurance
The life insurance market’s outlook is revised to ‘stable’ from ‘negative’ due to stronger balance sheets, recovering financial markets and less risky liability profiles. For instance, according to S&P, variable annuity writers have increased their hedging of older in-force business and have made new offerings less risky by lowering guaranteed benefit bases, making investment elections more restrictive and charging higher fees.

However, the good news is tempered by some sobering observations: fierce competition, the impact of low interest rates on profitability and the potential for commercial real estate losses.

Many companies are offering “commoditized products through independent distribution where competitive pricing and producer compensation are crucial to sales.” For instance, during 2010, some companies have seen sales of term life insurance rise or fall by 20% or more, reflecting their pricing actions or the actions of their competitors, according to S&P.

And, low interest rates could impact the interest margin between earned and credited rates for fixed annuities and universal life insurance as well as variable annuity writers. Most insurers have “room to maneuver before reaching contractual guaranteed minimum interest rates on more recent blocks of business, but “interest-sensitive products will be constrained until rates pick up.” Rates will be manageable in 2011 but could be a drag on earnings if rates don’t increase by 2012, the rating agency says.

In spite of these challenges, S&P maintains that there are bright spots for life insurers: retirement income and the underinsured middle market. The key for insurers will be to overcome the products’ greater risks than those presented by traditional life insurance products.

Property-Casualty

Property-casualty insurers faired pretty well during the recent economic downturn, according to S&P. However, this segment of the industry will continue to contend with issues such as lower interest rates and weak pricing, the rating agency adds.
There is a real divide between how commercial and personal lines are performing, according to S&P. While personal lines have shown improvement since 2008 because of factors including more favorable pricing, commercial lines are challenged by a sustained soft market marked by price cutting that is reducing profits, says S&P. Lower pricing and decreased investment income has strained earnings, the rating agency adds. And, it says, commercial lines with long-tails where companies usually don’t know about or settle claims for at least a year might be concealing “the unfavorable market's full effect on profitability.”

Health

Health insurers performed better than expected in 2010, S&P says. And, going forward, industry risk appears to be moderating and business opportunities measured by growth and retention and access to capital are stabilizing, it continues. However, margins are expected to be thinner than 2010 results and even with an increase in payroll employment, growth is expected to be slow, S&P adds.


Workers Compensation

S&P offers its assessment of this segment of the industry by noting that “the U.S. property/casualty (P/C) workers' compensation insurance industry has reported underwriting losses in all but three of the past 20 years. And future underwriting profitability in this sector doesn't look promising, at least
over the next two years.”