Life Insurance
‘The Best of Times… the Worst of Times’

• Jeff Roberts
• October 2019
• 

Life insurers currently are facing many challenges—a “forever rate environment” that is straining balance sheets carrying products that were priced decades ago and exposure to some products that have clearly gone wrong. However, there's still a lot of growth potential for this market, says Colin Devine, principal of C. Devine &Associates.

Devine spoke with ^AMBestTV in its Oldwick, New Jersey, studio. Following is an edited transcript of the interview. 

What is the state of the life insurance industry right now and where is it headed, especially with a recession possibly looming?

If you think about it, it's probably the best of times and the worst of times. On the best of times, the demand for insurance products and post-retirement-type products has never been stronger as the boomers are aging.

The flipside of that, of course, are interest rates are in this low, forever rate environment and the very real strain that is putting on companies' balance sheets because life insurers have products that they priced 10 years ago, 15 years ago, 30 years ago, clearly in a much higher rate environment. That's quite significant.

There's also a couple of products that have clearly gone wrong. Variable annuities have had their challenges. The secondary guarantee universal life has had its challenges. Of course, more recently, long-term care is really having its challenges. As they say, there's a lot of growth potential but there's also some real issues. 

There's a lot of volatility in the equity markets. How are life insurers going to weather it if a recession happens compared to other sectors?

Life insurers, again, I always try to separate how the company is going to do financially, how they're going to do with stocks. In a low rate environment, low equity markets, life insurance stocks are probably not the place you want to be. Life insurance companies, that's a very different question.

Life insurers, generally, have very little exposure to equity markets. Where they do, it's through variable annuities, variable life, and every company I know has a very comprehensive hedge program to protect themselves from that. From a balance sheet perspective, I think they're in great shape. As stocks, maybe not quite as appealing. 

What measures have the insurance industry taken knowing that long-term care as a product has been troublesome?

What measures have they taken? You can look and just go, how many companies still write long-term care? There's been a race to the exit. I think there's maybe two or three significant companies still offering the product. That should also tell all of us what they think about the risk. They've got legions of actuaries out there.

Clearly, they've reached the conclusion that older age health is an uninsurable risk. Everybody should think about that. It's an absolutely uninsurable risk. We can predict how long you're going to live. We just can't predict how healthy you're going to be. You've seen some actions such as rate increases to try to protect those companies.

Obviously, that puts a lot of pressure on policyholders. How much further that's going to go remains to be seen. I think the best thing they've done is brought out the hybrid products with the accelerated death benefits where you can draw down a death benefit if you need it. If you develop a long-term-care-type situation, far better, because it's not use it or lose it.

If I don't, God willing, then I have a death benefit. I can leave it, tax free, to everybody and anybody I want. On the other hand, it's there to cover and I don't have to face rate increases. I know what it's going to cost and because they priced it on a bigger pool of people, you actually get a better price too.

Staying with retirement, there's been a lot of discussion within the industry about the SECURE Act. What would it mean if passed? I know it breezed through the House. Currently, it's being held up in the Senate.

For the SECURE Act, and hopefully, we can get this done, we certainly need it. It's going to open up 401(k)s to more people. It is, I think, a little more realistic with where it looks at requirement minimum distribution ages and to increase those, so that's great.

The biggest one is getting annuities in plan. 401(k)s, everybody has to remember, were only designed to be a form of supplemental savings. This was never designed to be your primary source of retirement savings. Somewhere along the way, it became that. Supplementals become primary but at the same time, there's no mechanism in it today that takes it from saving to income.

Income, if I put on my [certified financial planner] hat, that's, realistically, going to be another third of your life. You're going to need some help. You're going to need some products that are going to help get you through that next third when it's from your last paycheck. Hopefully, we can get this thing done. We need it. We need to get in plan solutions into IRAs and 401(k)s. We also just really need to get the dialogue going so people think, “This is a really long time and what are the risks that it entails?”