State of the U.S. Life Insurance Industry Robert Gomez March 1, 2012.

State of the U.S. Life Insurance IndustryRobert GomezMarch 1, 2012

Question

What was the significance of the Corporation for Relief of Poor and Distressed Presbyterian Ministers and of the Poor and Distressed Widows and Children of Presbyterian Ministers?

Answer

• The first life insurance company in the U.S.• Established 1759

Today’s Discussion

1. Industry Outlook2. Life Insurance Trends3. Annuity Market4. On the Horizon

Industry Outlook

• Strengths– Capitalization restored to pre-crisis levels– Liquidity position significantly improved– Credit losses on corporate bond portfolios declining– Stronger enterprise risk management

Industry Outlook

• Weaknesses– Persistent low interest rate environment– Eurozone contagion risk– Fragile global economic recovery– Potential further downgrade of U.S. credit rating

• Overall Outlook for 2012 = Stable (unchanged from 2011)

Industry Outlook

• Qualities of Top Insurers– Strong brand name– Broad & varied distribution channels– Product diversity– Top quality service– Advanced technology– Pricing power

Question

• Which life insurer held the most assets at year-end 2010?

Answer

• Met Life

• How much?

• $290 billion

Market Outlook

• Uncertainties– Investments– Interest Rates– Distribution

U.S. Individual Life Sales Trends

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

1975 1980 1985 1990 1995 2000 2004 2009

Polic

ies

Sold

(m

illio

n)

Ann

ualiz

ed P

rem

ium

($bi

l)

Term Life Insurance

• Most popular product• From insurer’s perspective:

– Competitive market– Little flexibility in premium changes– Sensitive to mortality

Whole Life

• High level premiums, not flexible for policyholder• From insurer’s perspective:

– Mutual company uses dividends to reflect experience– Profits affected by mortality, interest, expenses, and

persistency• Resurgence in popularity

Universal Life

• Flexible premiums• Unbundled product• Secondary Guarantees

– Specified Premium– Shadow Accounts– Concern over profitability & level of reserves

Variable Universal Life

• Sales followed stock market• Peaked in 2000• Equity-Indexed UL

Variable Market Share

U.S. Individual Life Annualized Premium Market Share

Source: LIMRA’s U.S. Individual Life Insurance Sales Trends, 1975-2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1976 1981 1986 1991 1996 2001 2006

Whole Life Term Life Universal Life VL/VUL

US Life Insurance Ownership (Percent of Households)

Source: LIMRA Household Trends in U.S. Life Insurance Ownership

Life Insurance OwnershipAmount of Life Insurance

Annuity Market

• Variable or Fixed• Deferred and Immediate• Tax-qualified and Non Tax-Qualified• Longevity

Annuity Sales ($billion)

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Deferred Variable Deferred Fixed Immediate

Annuity Sales % Change

Source: LIMRA U.S. Individual Annuity Yearbook & U.S. Individual Annuities

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Deferred Variable Deferred Fixed Immediate

Variable Annuities

• Sales following stock market trends• Guarantees on account value

– Guaranteed minimum death benefit – Guaranteed living benefits

• Accumulation• Withdrawal• Income

• From insurer’s perspective:– Risk management and hedging– Asymmetrical risk– Revenues derived from % assets

• When stocks decline, so do revenues collected

Fixed Annuities – Deferred

• Guaranteed interest rates• Book Value Surrenders vs. Market Value Adjustments• Equity Indexed

– Growing market share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2002 2004 2006 2008 2010

Deferred Variable Indexed Other Deferred Fixed

Fixed Annuities - Immediate

• Mitigates post retirement uncertainties• Most popular types have fixed period of guaranteed

payments with life contingencies• Difficult purchase for many consumers• Potential for strong growth in the future

Question

• Which state was the first to forbid gender discrimination in insurance rate-setting?

Answer

• Montana, in 1985

On the Horizon

• Regulation• Principle Based Approach• Baby boomers

– LTC combination products– Longevity insurance

• Pandemic Scenario• Life Settlements• Genetic Testing

Robert Gomez ASA, MAAA

State Farm Life/Health Actuarial

[email protected]