Analysts at AM Best have reported that the US Life/Annuity (L/A) insurance segment remains well-positioned to meet challenges in 2023, supported by high levels of risk-based capitalization, strong liquidity profiles, and robust sales in annuity products.
Despite this strong position, the rating agency AM Best acknowledged that there was some volatility for the L/A space in 2022 due to inflation and interest rate movements.
But moving further into 2023, it expects segment challenges to be manageable given insurers’ prudent capital and liquidity management, and ERM practices.
Higher interest rates also create an economic benefit and improve investment yields, it noted, although the impact of rising interest rates will depend on the blocks of businesses each company writes.
Additionally, the growth in life insurance products since the 2020 onset of the pandemic may wane, as consumer concerns move to the economy, analysts warn.
Looking ahead, AM Best highlights market-sensitive lapse rates, asset credit risk, and the ongoing need to attract talent as among the top challenges for the sector, with insurers that can manage tech improvements likely to be the industry drivers.
“Economic uncertainty is far from over, but the US life/annuity segment appears well positioned for the challenge,” AM Best wrote in a recent report on the L/A market.
“Statutory capital is down only slightly, and the rising interest rate environment will help raise portfolio yields. Credit risk remains, but permanent losses have yet to emerge. Companies prepared for these challenges by looking for sources of liquidity when it was cheaper instead of when it was needed,” it explained.
“Many L/A insurers are faced with liabilities that have less-certain cash flows due to embedded market risks and this further demonstrates to insurers the importance of sound liquidity management in uncertain times.”