Ratings agency see insurers and annuity issuers faring well in a normal 'bad economy' scenario
North American life insurance and annuity issuers ought to fare well in a typical poor economy.
Fitch Ratings analysts made that evaluation based on how they believe insurers across the world may fare in a global scenario of central banks worldwide raising interest rates in an effort to keep prices down.
As noted by ThinkAdvisor, ratings made by analysts from Fitch and its rivals offer lenders and insurance buyers clues to determine how strong an insurer is. The thinking behind their ratings, can affect the costs for insurers to borrow money by issuing bonds, as well as the premiums and fees they can charge for life insurance policies and annuities.
The analysts predict that an economic downturn could reduce sales for North American life insurers, but would have a neutral effect on profit margins and reserves. Rising rates would be provide a lift for life insurers' investment yields, they added.
When COVID-19 struck, it proved a years-long assertion by some rating analysts that North American life insurers could handle the claims from a major pandemic. Now, they claim that those life insurers can handle a typical bad economy.
Read more: COVID-19 impact on life insurers limited, research suggests
The analysts believe that a typical weak economy in North America would entail 9% inflation this year, 6% the following year, and 3% in 2024; yields on 10-year U.S. government bonds clocking an average of 3.25% this year and 3.75% over the following two years; and GDP growth decelerating to 1.5% this year, then weakening further to 0.5% next year before rebounding to 1.5% in 2024.
Charts from the Fitch analysts showed the potential impact of their baseline bad economy scenario on various performance metrics for different insurer types.
For regulatory reasons, the typical North American life insurer tends to lean towards investments in high-grade corporate bonds, as well as some mortgages, mortgage-backed securities, government bonds, and other interest-sensitive holdings. Therefore, rising rates can significantly boost their investment yields.
Read more: Canadian life insurers' portfolios at risk from asset-quality erosion
The effects of the baseline scenario may be favorable for traditional life insurance profit margins but unfavorable for traditional life sales and investment returns for life insurers in Europe and the Asia Pacific regions, which employ different investment and accounting rules.
According to the Fitch analysis, North American life insurers could experience lower profits but higher investment returns than their counterparts in Europe and the Asia-Pacific region under its bad economy scenario.
When negotiating life and health insurance contracts in recent years, life insurers in North America and Europe have a propensity to concentrate on the Asia Pacific region.
If the Fitch analysis is accurate, its base case of a bad economy could increase the opportunities for acquisition in the Asia Pacific region and create some opportunities for acquisition in Europe.
