AM Best is maintaining a negative market segment outlook on the U.S. life and annuity insurance segment for 2021. The ratings agency bases this outlook predominantly on the ongoing economic and financial market uncertainty created by the COVID-19 pandemic.
In a Market Segment Report AM Best notes that although mortality is elevated due to the COVID-19 pandemic, life and annuity carriers have largely weathered the impact of higher death claims with limited impact on overall capitalization. The report notes that elevated mortality has been more evident at older ages, which has impacted some companies more than others depending on product and market focus.
Given the asset-intensive and interest rate-sensitive nature of the products sold in the life and annuity segment, Best says the current environment poses even greater risks to company balance sheets from the potential economic and financial market impacts than from elevated mortality and morbidity risks.
Even though financial markets have remained relatively stable, AM Best remains concerned about the potential future impact that “lower for even longer” interest rates and the ongoing COVID-driven economic downturn ultimately will have on life and annuity carriers’ financial results and balance sheets. Other factors supporting the negative outlook include:
- Expectations for intensifying spread compression from “lower for even longer” interest rates, together with narrowing credit spreads;
- Likelihood of reserve increases and/or asset adequacy reserve charges in response to lower long-term interest rate assumptions;
- Asset impairments likely in sectors heavily impacted by the current environment; and
- Top-line challenges further exacerbated by the ongoing pandemic.
AM Best’s view that life and annuity carriers were well-positioned to absorb the elevated mortality aspect of the current pandemic has been largely validated by the financial results of the segment year to date. Even so, AM Best says the ultimate impact on balance sheets from the economic downturn and the associated lower interest rates has yet to play out fully.
Improvements to enterprise risk management (ERM) frameworks implemented over the last 12 years have gone largely untested, until now. While the end of the current pandemic and its associated economic impact is not yet in sight, early indications suggest that ERM frameworks have been effective so far — at least in terms of capital and liquidity management.