Best’s Market Segment Report: Ordinary Life Insurance—What Lies Ahead?

Direct premiums written in ordinary life insurance grew to a historical high of $147.8 billion in 2017, with further year-over-growth of 1-4 % likely in 2018, according to a new A.M. Best report.

The Best’s Market Segment Report, “Ordinary Life Insurance—What Lies Ahead?” states that total ordinary life direct premiums written have been rising since the most-recent low of $124.4 billion in 2009, owing to the fourth-quarter 2008 credit freeze amid the financial crisis. Since then, improved economic conditions and product design have helped ordinary life insurers better manage earnings volatility.

Insurers’ enterprise risk management capabilities are playing an increasingly pivotal role in product design, pricing and modeling. In A.M. Best’s view, this has been one of the primary drivers for an insurer’s ability to allocate capital more effectively to higher-risk products, while making marginal improvements in ordinary life product offerings. Using technological improvements, insurers have improved the underwriting process and have become better able to reach new customers and cut down on the time needed to onboard new business. Since lapse and persistency rates directly impact short- and long-term profitability, how ordinary life products are priced and sold remain important factors for life/annuity insurers.

Direct premiums written have been migrating from single-premium products to a more stable renewable premium product line. Over the past decade, the proportion of renewable direct premiums written has grown to a high of 73.3% in 2017 from 58.7% of premiums in 2007. Conversely, single premiums written declined to a low of 13.3% in 2017 since the 2007 high of 27.7% of premiums, while first-year, other-than-single premium has been consistent. The report notes that single-premium products without guarantees are the most adversely affected in a declining interest rate environment. A.M. Best expects that insurers will be able to stabilize yields on their invested assets over the short term as the Federal Reserve incrementally raises interest rates, while gradually changing investment portfolio allocations in the least disruptive way over the medium term, barring any upward interest rate shocks.

A.M. Best regularly monitors insurers’ lapse rate assumptions to assess whether pricing assumptions are affecting liquidity and profitability. Additionally, A.M. Best views more favorably those companies whose portfolio mix has a greater percentage of products that are more creditworthy and less risky. A.M. Best considers ordinary life insurance products more creditworthy and less risky, with whole life being the most creditworthy. The weighting and diversification of product types can have a positive impact on A.M. Best’s assessment of the business profile’s building blocks during the ratings process, with persistency and lapses being an important measure of profitability and business profile.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=279339.

A.M. Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.

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