In a new report from AM Best, the rating agency has stated that it is maintaining a stable market segment outlook on the US life/annuity insurance industry for 2023.
Best cited factors that include favourable earnings, strong liquidity profiles and strong levels of risk-adjusted capitalization among carriers.
In the report titled Market Segment Outlook: U.S. Life/Annuity, Best highlighted that macroeconomic challenges such as inflation and capital markets volatility are expected to hamper profitability compared with prior years.
At the same time, rising interest rates have also decreased the value of bond holdings, which ultimately has led to unrealized losses on fixed maturities.
However, the growing uncertainty that surrounds the direction and pace of interest rate changes further demonstrates the need for insurers to maintain strong asset-liability matching programs and conduct routine rigorous stress testing of portfolios.
Best also noted that despite some earnings volatility, capital markets gains and diversified earnings streams have helped offset the mortality impacts of COVID-19.
Furthermore, Best claims that higher interest rates could create an economic benefit owing to improved investment yields, should other dynamics within the industry continue to be monitored as well. This includes market-sensitive lapse rates, asset credit risk and the ongoing need to attract talent.
Best warns that the segment also may see more disruptions in the near future as competition evolves, business models change, automation and artificial intelligence advance, and environmental, social, and governance awareness grows.
“Many leading companies generated record sales and reported solid earnings performance in the second and third quarters of the year; however, spiking interest rates have significantly impacted the third-quarter earnings of companies, particularly those with interest-sensitive liabilities,” said Jacqualene Lentz, director, AM Best.
“Insurers will need to place a greater emphasis on liquidity management in the current environment of rising interest rates and potential credit losses.”
“Insurers who are able to manage technological improvements and transform for the better have the potential to drive the industry forward. Managing risk accurately through uncertainty necessitates a thorough review of strategies to reveal vulnerabilities. Risk culture goes hand in hand with risk management,” said Edward Kohlberg, director, AM Best.
Meanwhile, AM Best recently announced that its outlook for Argentina’s insurance industry remains Negative, due to the country’s persistent economic challenges.
