Kroll Bond Rating Agency (KBRA) has warned that the US life insurance industry may be challenged in the near to medium term by key risk exposures such as interest-rate risk, credit risk and equity-market risk.
In its US life insurers’ 2016 outlook, KBRA said in the US banking industry, there are clear signs of
mounting future credit risk present in the zero or low default rates being reported and the increased provisions for future losses.

Additionally, the ratings agency said the Chicago Board Options Exchange Volatility Index (VIX) — also known as the investor fear gauge — an indicator of the uncertainty of future equity valuation, is trending up and has recently surpassed its long-term average.

KBRA believes these trends indicate greater potential for a financial market downturn as the Federal Reserve’s extraordinary market intervention comes to an end. It said the insurance sector is especially vulnerable to changes in the credit cycle.

As well as economic headwinds, KBRA said the US life insurance industry perpetually contends with regulatory issues, both at the state and federal levels.

Principle-based reserving

The KBRA report said: "For over a decade, the industry has been working to implement principle-based reserving (PBR), which is more of an economic approach to calculating reserves — to better reflect the true underlying risk inherent in the policies.

"Likely to be effective January 1, 2017, PBR will replace interim solution Actuarial Guideline 48 (AG48) — a framework developed mainly to address funding mechanisms related to level term and UL with secondary guarantees. The process will be complex, and the overall impact on the industry is difficult to quantify at this juncture."

KBRA concluded that although many would agree the risks some large life insurers pose to financial stability are on the rise, KBRA believes capitalisation is sound across the sector.

Its report said: "Life insurers have been actively pursuing strategies to maintain favourable earnings trends such as lowering crediting rates, raising cost-of-insurance charges, employing niche investment strategies, paring non-core/ underperforming lines, streamlining operations and using advanced technology to administer existing and acquire new business."

Commenting on the outlook for the US life market, LIMRA CEO Bob Kerzner recently told Life Insurance International (LII): "One of the things I think will impact most in 2016 is the high-level discussions around disruption. US life company executives at a senior level are focusing a lot on what could disrupt or disintermediate them."