INDUSTRY

Premiums Increase as the Number of Insureds Declines for Life/Annuity Industry

Net operating earnings for the U.S. life/health industry are also up, having increased 19.5 percent to $23.3 billion in the first half of 2012, compared with $19.5 billion generated for the same period in 2011, according to A.M. Best. Statutory net income increased 33.8 percent to $19.1 billion for the first six months of 2012, compared with $14.3 billion for the same period last year. The increase was predominantly due to higher operating earnings and lower realized losses.

The increases also came despite a persistent low-interest rate environment, which has depressed earnings. However, A.M. Best notes that this has been offset by a “net increase in invested assets derived from positive net flows, rising equity markets and the benefit of pricing actions taken in the second half of 2011.”"A major reason for this trend is the increase in the more pricey whole life insurance contracts which offer more guarantee, on the expense of other flexible premium life contract,” said Ed Sneneh of Insurance Navy, adding that sales volumes are improving.

A.M. Best further noted the volatility of interest rates as measured by the 10-year Treasury bond in the first half of the year, and that while they rose by 35-basis points in the first quarter, they declined by 56-basis points in the second. A.M. Best also noted that insurers have adapted by de-emphasizing fixed annuities and universal life, while growing sales of variable universal life, indexed universal life and traditional term insurance.

Life/health insurers also are adjusting product offerings to manage the effects of low-interest rates on the profitability of certain products, revising annuity offerings and adjusting living benefit riders and refilling with lower minimum guarantees, many of which are now 1.5 percent or lower.

Asset allocations models are reverting to risk-on profiles after the de-risking that was predominant during the financial crisis of 2008 and 2009. A.M. Best said it has seen greater allocations to NAIC2-rated (investment grade) fixed-income securities, private placements and alternative assets, such as private equity. As a percentage of total invested assets, this shift “remains modest to date and is not expected to significantly affect the overall credit quality of portfolios,” the report reads. The overall allocation to commercial mortgage loans remains consistent, as maturing loans are essentially being offset by new originations and a modest amount of restructurings.

As a result of the persistent low-interest rate environment, in 2012 there has been a shift away from both the fixed and variable annuities business, which increased 10 percent in 2011.

And, as people nearing retirement are concentrate on rebuilding wealth that was lost during the crisis, companies have continued to de-risk product portfolios to mitigate compressed spreads and volatile earnings, and de-emphasized interest-sensitive product lines.

European Insurers Struggle with Solvency’s Data Management Standards

While the majority of insurers plan to be ready by the proposed 2015 deadline, many still have to address their IT practices.

As the January 1, 2015 deadline for proposed Solvency II standards approaches, 90 percent of European insurers believe they will be ready to comply, according to new research from Ernst & Young. That is more than double the estimate of insurers (43 percent) that would be ready by January 1, 2014.

However, the majority of insurers are also admitting to struggles with Pillar 3, as well as the push to meet data management requirements. There are also certain regions struggling: 34 percent of German, 17 percent of Italian and 13 percent of Spanish insurers do not think they will be ready to comply until after January 1, 2015.

Nearly 69 percent of insurers say they have only met some or have not yet met any of the SII data management requirements; 81 percent are struggling in particular with data integration standards and their applications across group and external partners.The report noted the Netherlands and the U.K. as overall leaders in preparedness, but noted an lack of action in terms of preparing IT operations.

“Making the data landscape work requires firms to integrate multiple complex IT systems and is a massive challenge,” said Jan Leiding, partner in Financial Services at Ernst & Young. “The survey shows that progress in implementing appropriate ownership, governance and controls is particularly slow. The shifting EIOPA deadlines have offered excuses but these will be viewed as fundamental failings and now require prompt attention.”

The report also stated that half of respondents are now developing partial or full internal models. Insurers currently estimate an average decrease in SCR of 16 percent from using an internal model and many insurers expect the savings to be much more substantial: 26 percent of insurers expect their SCR to decrease by 20 to 30 percent; 14 percent of insurers expect it to decrease by more than 30 percent.

160 large insurance companies across Europe were surveyed for this report, according to Ernst & Young.

Strong Financial Bounce-back for P&C Insurers in 2012

Catastrophe losses, while remaining elevated compared with recent years' experience, declined significantly from 2011’s record levels. In addition, rate increases and exposure growth drove increases in net premiums written and net premiums earned.

The industry's net income nearly tripled, to $20.4 billion from $7.0 billion at June 30, 2011, driven by improving underwriting results. While the industry continues to post an overall underwriting loss, the reported combined ratio of 101.0 for the first six months of 2012 improved more than eight points, from 109.5 during the same period last year. Net investment gains of $28.1 billion were down slightly from $28.7 billion in the prior year.

The underwriting ratio reflects lower catastrophe losses, which accounted for 6.0 points of the industry's 2012 six-month combined ratio, less than half the 12.7 points of catastrophe losses during the first half of 2011. Improvement in core (i.e., non-catastrophe) losses also contributed to the improved combined ratio, while the underwriting expense ratio increased slightly to 28.8 from 28.6.