As sales of annuities – notably fixed annuities and fixed-indexed annuities – by U.S. life insurers have ballooned since 2021, S&P Global Ratings explores the challenges facing life insurers.
In a recent report released by the firm, it reveals that demand for annuities, as well as other forms of private retirement benefits has been increasing with favorable market conditions, demographic shifts, and greater consumer demand for life retirement income, as most jobs have stopped providing defined benefit pensions.
But, according to analysts, annuities have become “more attractive to policyholders” ever since interest rates have started to climb and insurers have raised the crediting rates on annuities.
Life insurers are facing a number of key risks and trends.
Regulatory hurdles related to capital standards, offshoring, selling practices, or new standards remains a very high risk, as does heightened cyber attacks, with no expected change.
The effects of interest rates on spread earnings and top-line sales present a moderate risk with no expected change.
Additionally, geopolitical and macroeconomic tensions threatening economic recovery present an elevated risk, with no expected change.
Persistent inflation weighing on expenses and affecting profitability also remains a moderate risk, as does higher credit defaults.
S&P also flagged challenges within the commercial real estate market and commercial mortgage loan portfolios as moderate risks, as well as counterparty risk from offshore reinsurance solutions and sidecar activity.
Furthermore, while there is a possibility that interest rates may start to fall in 2024, S&P stated that it does not expect annuity sales to return to pre-2020 levels.
“This is because we don’t expect interest rates to return to the extreme lows of 2009- 2020, and the demographic factors will continue to spur demand for annuities,” the report reads.
Nonetheless, S&P explained that as life insurers continue to shift more into the retirement space, they are increasingly exposed to market risk.
“Traditional life insurance policies present insurers with biological risk, which is much more predictable–and therefore easier to price. Further, life and retirement policies don’t renew the way P/C policies do, so life insurers don’t have the same opportunity to reprice as risks become apparent,” analysts noted.
As a result of this, the shift toward retirement in life insurers’ product mixes will likely limit any ratings upside and, over the longer term, which possibly may start to push ratings down.
