Progress along the US life industry’s road to recovery
presents a mixed picture. Major positives are a desire by consumers
to obtain life cover and the industry’s strong profit recovery in
2009. However, recovery remains constrained by economic uncertainty
and high unemployment. Charles Davis reports.


Bar chart and line graph showing US LIFE INSURANCE INDUSTRY,Research on a
variety of US life insurance issues paints a picture of a steadily
improving market with plenty of underserved markets.

Glimmers of recovery, coupled with
growing demand from a rapidly aging populace, underscore the
opportunity for insurers, if only the precarious economy holds.

The biggest news: a recent report
by Limra, the worldwide association of insurance and financial
services companies, found ownership of individual life insurance
policies in the US at a 50-year low. The report, The Trends in
Life Insurance Ownership
, is conducted by Limra every six

“Clearly, more American families
are living on the edge – surviving from paycheque to paycheque –
and, as our new study suggests, too many without the safety net
that life insurance provides,” said Limra CEO Robert Kerzner.

“The numbers tell a grim story.
Today there are 11m fewer American households covered by life
insurance compared with six years ago. A majority of families
either have no life insurance or not enough, leaving them one
accident or terminal illness away from a financial catastrophe for
their loved ones.”

Specifically, Limra’s study found
only 44% of US households have individual life insurance policies,
and among households with children under age 18, which arguably
have the greatest need for life insurance, 11m families have no
life insurance coverage.

More than 40% of Americans say a
major reason they have not bought more life insurance is because
they have other financial priorities right now, such as paying off
debt or saving for retirement. However, the drop in life insurance
ownership is not because families are not feeling vulnerable.

Among households with children
under the age of 18, 4 in 10 say they would have immediate trouble
meeting everyday living expenses if the primary breadwinner died
today. Another 3 in 10 would have trouble keeping up with expenses
after several months.

Amid the gloomy picture painted by
Limra’s report there is a major positive: half of American
households feel they need more life insurance – the highest level

In addition, 24% of households with
children under the age of 18 want to speak to a financial
professional about their life insurance needs and a quarter of all
households plan to buy life insurance in the next year. According
to Limra’s study, life insurance beat out all other sources of
financial assets or income that Americans expect to use to help pay
bills and to maintain their lifestyle in the event of the primary
wage-earner’s death.

Marvin Feldman, CEO and president
of non-governmental organisation the Life Foundation, commented:
“This study shows that Americans place great value on the need for
protection and half of all families recognise that they need more
life insurance than they have, and that’s good news.”


Banks set the

Bar chart showing US LIFE INSURANCE INDUSTRY, source of profits, 2009Despite the
overall paucity of life coverage nationally, banks may be on pace
for a record year in sales of life insurance, according to Limra’s
latest Bank Life Report released in September.

Premiums of $4.6bn collected by
banks in the second quarter of 2010 came largely from the huge
growth in popularity of single-premium products, reports Limra.

In fact, life insurance sales at US
banks has been growing quickly since the second quarter of 2009,
when insurance premiums hit $3.1bn, up from $1.7bn in the first
quarter of 2009. Premiums have steadily advanced since then and
show little sign of stopping, according to Limra’s research.

Sales in the first half of this
year were 29% higher than a year earlier – the largest growth rate
in any life insurance distribution channel.

In an encouraging corollary
finding, the Insured Retirement Institute (IRI) reported total US
sales of variable annuities rose to $33.9bn in the second quarter
of 2010, an 8.3% increase from the same period in 2009.

Year-on-year sales of these stock
market-linked retirement-savings and income products advanced at
the greatest pace since 2007, IRI said, adding yet another sign
that investors are slowing returning to the market.

Adding weight to Limra’s findings,
a survey from insurer State Farm shows that since the economic
downturn in 2008 and the uncertainty it has created for people’s
finances, a majority of Americans say life insurance is more
important than it was two years ago.

However, 74% of couples say they
rarely or never discuss the topic. The survey found that talking
about life insurance is particularly difficult for men and women
who are primary earners for the family.

These respondents say key reasons
for avoiding the topic include stress over daily economic pressures
and concern that a partner might react negatively – especially in
the event of a job loss.

The survey, conducted by
consultancy KRC Research, shows that among couples who are unlikely
to discuss life insurance, the topic is especially concerning for
women when faced with the prospect of becoming the primary earner
for the family.

When asked about why they would not
initiate a conversation about life insurance, respondents cited
financial stress as very or somewhat important.

Women were significantly more
likely to remain silent, with 64% saying they would be too stressed
to initiate a conversation with their spouse. This compares with
47% of men faced with the prospect of being the sole

The recession has the rattled
survivors interested in hearing more about life insurance and
financial planning.

A recent study by New York Life
Insurance Company of a nationwide sample of adults over 30 years
old shows a need for safety and security when it comes to their
financial plans. Nearly half (46%) of adults aged 30 and over
surveyed say they are taking less risk now than they did before the
recession, including one quarter (26%) who say they are taking much
less risk than they used to.

Pull quoteAnd when
Americans aged 30 and over were asked what new steps they had taken
as a result of what has become known as the ‘Great Recession’, 14%
said they have consulted a financial professional about long-term
financial objectives.

Nearly one quarter of these
respondents (22%) had done so for the first time, and 14% reported
they had considered the financial strength and/or reputation of
companies before engaging with them financially.

This is encouraging news for
insurers, whose bank sales are still just a fraction of the overall
life market. However, while bank life insurance premiums hit an
all-time high of $4.6bn last year, the $200bn in sales of annuities
through banks puts that number into perspective.

Indeed, for the life industry,
annuities have become its biggest profit generator. This was
revealed at a presentation in Alabama on 30 September by Steven
Weisbart, chief economist and senior vice-president of industry
organisation the Insurance Information Institute.

According to Weisbart, annuities
generated $27.06bn in profit for the industry in 2007, 54.3% of the
total profit of $49.82bn.

How these%ages have changed in the
wake of the financial crisis remain to be seen. The most recent
indication provided by Weisbart is that the industry incurred a net
loss of $29.97bn on annuities in 2008.

In that year, the life industry’s
total net profit fell from $31.9bn in 2007; then collapsed to a net
loss of $50.6bn in 2008; before recovering to a net profit of
$21.1bn in 2009. The industry’s net profit peaked at $36.2bn in


Growth in income and
employment vital

In the personal life and health
insurance segments combined, Weisbart pointed to the strong
correlation between premium income and disposable income.

Over the past decade, the only
major exception to this rule occurred in 2009 when life and health
insurance premium income fell by 19% compared with 2008 while
disposable income managed a marginal increase of 1%.

Weisbart pointed out that annuity
premium income reflects a similar trend-relationship with
disposable income and also collapsed in 2009, falling by almost a
third compared with 2008 from $332.9bn to $225.1bn. The slump in
the life and health and annuity sectors resulted in premium income
falling to the lowest level relative to disposable income in two

There is also a very close, but
volatile, relationship between group insurance premium income and
non-farm employment. This is reflected in high levels of growth in
premium income in periods of strong economic growth and rising
employment and sharp declines in premium income during tough
economic times and falling employment.

Taken over the period between 2001
and 2009, non-farm employment fell from 132m to 131m while group
premium income fell from $28.2bn to $25.1bn. This amounts to 21% of
total life premium income of $120.2bn.

Illustrating the volatility of the
relationship, between 2003 and 2007, a period of solid economic
growth, employment rose from 130m to 138m (6.2%) and group premium
income from $25.3bn to $37.9bn (49.8%).

Similarly, the fall in group
premium income between 2007 was far steeper than the fall in
employment, specifically 34% versus 5%. Clearly, for group life
premium income to display any significant recovery a strong rise in
economic growth and employment is required, both of which at
present are not being seen.


Impressive cost

While the US life insurance
industry has struggled to achieve premium income growth in recent
years it has displayed an impressive ability to cut costs.

In his presentation, Weisbart
highlighted that, since 2007, the industry’s total costs, excluding
commissions, have been slashed from $154.6bn to $97.3bn in 2009.
This represented a decline of 37% and took total costs in 2009 to
the lowest level since 1995. The industry’s total costs peaked at
$193bn in 2000.

In the industry’s cost-cutting
drive, a major factor, but certainly not the only one, has been a
steady decline in its workforce. This peaked at about 560,000 in
1995, reached a low of 315,000 in 2005 and moved up to 354,000 in
2006 before falling again to 343,900 in July 2010.

Suffering the most in recent years
have been insurance agencies and brokerages which saw employment
slump by 47,900 between December 2007 and July 2010 to 631,700. The
number in July was, however, still significantly higher than the
20-year low of just above 500,000 seen in 1993.

A promising development noted by
Weisbart was a rising trend in applications for individual life
insurance, especially in the age segments of over-60 and 45 to 59
during 2009. However, this positive trend has faded during 2010
with data from analytical company MIB Group indicating that the
recovery is, at best, faltering.

In its most recent analysis, MIB
found that overall individual life application activity in August
was down 1.8% compared with a year earlier. MIB noted in the first
eight months of 2010, declining months outnumbered gainers by five
to three, with the three consecutive months to August in negative
territory. In August, year-to-date application activity was down
0.8% year-over-year.

Clearly, what the US life industry needs to generate a
sustainable recovery are clear signs the economy is on the road to
stronger growth and fears of a double-dip recession are

Bar chart showing US LIFE INSURANCE INDUSTRY, Net profit

Bar charet showing US LIFE INSURANCE INDUSTRY, Total costs

Line graph showing US LIFE AND ANNUITY PREMIUMS, as a percentage of disposable income