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April 22, 2013updated 13 Apr 2017 8:39am

The relatively low life insurance penetration of the US continues to attract global players

With 31 million Americans not covered by life insurance products and a rising life expectancy, the US life insurance market still offers good opportunities for growth according to the report Life Insurance in the US, Key Trends and Opportunities to 2016, available on the Insurance Intelligence Center.

By Verdict Staff

Insurance industry attractiveness

The US insurance industry continues to suffer from the consequences of the global financial crisis in 2009, high levels of unemployment, a changing regulatory environment, low interest rates and the volatile stock market. Low investment returns and the recurring sovereign debt concerns in EU member states also add pressure to the industry. Despite this however, the insurance sector has managed to post positive growth, albeit marginal, during the review period (2007-2011), expanding at a 0.9% CAGR. The expansion has been mainly attributed to the robust growth recorded in the personal accident and health insurance segment, which increased at a CAGR of 5.7% as a result of the rising healthcare expenditure and life expectancy. The industry is expected to post stronger growth over the forecast period at a CAGR of 3.1%. This will be driven by the country’s improving economy and an increase in the employment rate. The US’s GDP is anticipated to grow at annual rates of 2.2%, 1.9%, 2.4%, 2.7% and 2.7% during 2012-2016. In addition, the unemployment rate is expected to decrease over the forecast period from 8.2% in 2012 to 6.5% in 2016.

In terms of the US life insurance segment, its relatively low insurance penetration continues to be a key point attracting global investors to the industry. In 2011 it stood at 4.0%, compared to 7.4% for the UK (in contrast, non-life insurance penetration as a percentage of the GDP stood at 3.3%, slightly above that for the UK at 3.1% in 2011). As of 2011, 31.0 million Americans did not have access to life insurance products while 49.9 million lacked health insurance. These moderate insurance penetration rates and large uninsured population create a significant opportunity for global insurers to venture into the respective segments.

The recent regulatory changes observed in the US insurance industry are likely to improve the effectiveness and efficiency of insurers to cope with global and local episodes of financial turmoil in the future. Insurance industry reforms include the Health Care and Education Reconciliation Act of 2010 in regards to amendments of the Patient Protection and Affordable Care Act (PPACA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 and signed by the US President, Barack Obama. The main objectives of these reforms are to improve the effectiveness of the state regulatory systems and to bring more Americans into the insurance fold. For example, according to PPACA law, it is now compulsory for all individuals to obtain health insurance and penalties are applied to those who refuse the coverage. In addition, it is now mandatory for establishments with 50 or more employees to provide health insurance coverage to employees. Such reforms are likely to drive growth in the personal accident and health insurance segment.

However, despite these initiatives, the US insurance industry is still exposed to low interest rates, downgrades of financial strength ratings of the large-scale insurance companies by the leading rating agencies Standard and Poor’s and Moody’s, the high volatility of the stock market, fiscal tightening, low consumer confidence, low investment returns, and concerns about financial stability in Europe. In addition, the changing regulatory environment in the country and the implementation of EU initiatives such as Solvency II will have a direct and indirect impact on the US insurance industry as several insurers from the EU operate in the US. The US insurers might lose their competitive edge to the EU counter parties in the absence of similar provisions.

Segment Outlook

The US life insurance segment registered a decline in gross written premiums, at a CAGR of -0.7% during the review period (2007-2012). The fall was a consequence of high levels of unemployment and the uncertain economic climate during the review period. Low investment returns, low interest rates and the changing regulatory framework contributed further to the downturn. Furthermore, the term life category registered a sharp decrease in gross written premiums at a CAGR of -6.1% during the review period as a result of the country’s weak economic development and unfavorable macro and microeconomic fundamentals. These factors forced Americans to remain liquid and avoid term-life insurance products, which only provide coverage in case of death.

However, the International Monetary Fund (IMF) projects stable growth for the US economy over the forecast period. Improving macro and microeconomic fundamentals are expected to encourage Americans to buy various life insurance products, including term life, which is projected to increase from US$12.4 billion in 2011 to US$13.9 billion in 2016, at a CAGR of 1.7% over the forecast period.

Favorable demographic factors include an increase in life expectancy and low life insurance penetration and is likely to increase the demand for annuity and other life insurance products over the forecast period. In addition, over 31.0 million households and approximately 11.5 million children under the age of 18 in the country do not have access to life insurance products. This will encourage insurers to capitalize on the untapped market with innovative and cost-saving life insurance products.

Moreover, the Federal Reserve is expected to move the benchmark interest rate after 2013, which has been locked by the Federal Open Market Committee (FOMC) until 2013. The current benchmark interest rate is 0.25%, which is very low when compared to the average benchmark interest of 6.2% registered during 1971 to 2010. However, analysts believe that the interest rate will rise sharply after the locking period ends in 2013. The revised interest rate is likely to boost the investment returns of the insurers and may stabilize the profitability.

Furthermore, in order to stabilize profit and gain market share in the economically challenging times, US insurers increased their focus on cost-saving distribution channels such e-commerce and mobile web. Insurers have invested heavily in technology development, including the customization of online portals and new application developments for Android and iPhone. These initiatives are expected to bring in new customers under insurers fold over the forecast period. Among the distribution channels, it is expected that insurance policy sales through the online channel and mobile web will increase significantly. ?Distribution channels

The US has one of most mature and highly competitive life insurance segments in the world. In order to sustain its position in the market place and gain market share, life insurance companies employ a variety of distribution channels. The US’ distribution network of life insurance products is comprised of independent agencies, insurance brokers, bancassurance, e-commerce, call centers and other distribution channels, including mobile web and shopping malls. Selling insurance products through the mobile web is expected to further strengthen business for insurers as over half of the US population is anticipated to be connected to the mobile web by 2015. Over the last five years, these distribution channels significantly supported insurance companies to generate business and reach potential customers in times of unfavorable business and economic conditions.

Insurance brokers played an important role in the expansion of the life insurance segment and generated 39.0% of the total new business written premiums in the segment in 2011. With over 135,000 professional brokers generating an annual revenue of over US$100 billion, the US insurance business is highly reliant on brokerage. Leading brokers, which include Aon, Arthur J Gallagher and Marsh, have a significant presence in the US insurance brokerage business and several cooperative agreements with a number of insurers. Overall, the number of policies sold through this channel increased from 26.8 million in 2007 to 28.7 million in 2011, at a CAGR of 1.7%.

Meanwhile, agencies represented the second-largest channel in the US’s life insurance segment accounting for 36.0% of the total new business written premiums in 2011. The agencies channel played a critical role in the development of the life insurance segment and was among the most preferred channel for life insurers. The primary reason for this strong preference was the fact that Americans are well educated when it comes to buying insurance policies and want to stay loyal to their existing insurance providers and purchase more from the same policy provider. ?News Update

August 2012: MetLife Inc. raised US$750 million through the issuance of senior unsecured notes. The notes bear an interest rate of 4.1% per annum, payable semi-annually on February 13 and August 13 each year, commencing on February 13, 2013. The notes are issued at a price of 99.4% to the principal amount, with a yield rate of 4.16%. The net proceeds from the offering are US$738.7 million. MetLife intends to use the net proceeds from the sale of the senior notes for general corporate purposes.July 2012: AIG’s life and retirement business division, SunAmerica Financial Group, Inc., signed an agreement with The Hartford Financial Services Group Inc. to takeover Woodbury Financial Services, Inc., an independent broker-dealer. The deal is expected to be complete by the end of 2012, subject to required regulatory approvals and customary closing conditions.

Post acquisition, Woodbury will operate as part of the SunAmerica Financial Group’s Advisor Group. Woodbury’s 1,400 advisors complement Advisor Group’s network, which includes over 4,800 independent financial advisors at Royal Alliance Associates, SagePoint Financial and FSC Securities Corporation. June 2012: The Prudential Insurance Company of America, a part of Prudential Financial, Inc., signed an agreement with General Motors Co.(GM) according to which Prudential will assume certain salaried retiree benefit obligations of GM. Upon closing, which is expected by the end of 2012, GM plans to buy a group annuity contract from Prudential. Subsequently, Prudential will assume responsibility for offering benefits to GM’s salaried retirees covered under the agreement, who retired before December 1, 2011.The deal is part of GM’s plan to minimize pension obligations by approximately US$26 billion. The agreement enables GM to maintain the value of US salaried pension benefits for its retirees while significantly minimizing its pension obligations.

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