U.S. life insurance companies in 2021 reported first-year individual life direct premium growth of 25%—the highest growth rate in the segment in more than 30 years. However, according to a new AM Best report, more than half of the insurers reported an operating loss despite the spike in new business.
In its Best’s Special Report, “US Life: Earnings Decline in 2021 Despite Highest New Premium Growth in Over Three Decades,” notes the public’s renewed interest in life insurance amid the pandemic, which can be reflected in new sales and renewals. The lapse ratio for individual life insurance fell to a 10-year low of 4.1% in 2021, helping renewal premiums grow 5.7%—the highest growth in the last 10 years. Together with new premium, overall individual life premium jumped 11% to nearly $16 billion, more than doubling the strongest year of the last decade.
The greatest percentage increase among individual life products was in the universal life segment, of which direct premiums rose 55.2% in 2021 after a precipitous drop the year before. Term life insurance premium fell by more than 5% after being the only product to post growth in 2020. Universal life with secondary guarantees increased in 2021, but at less than half the rate as universal life. Despite the uptick, many companies have been cutting back or discontinuing sales of higher capital-intensive or interest-sensitive products such as universal life with secondary guarantees.
“As interest rates rise, all eyes will be on how fast the increases will come,” said Jason Hopper, associate director, industry research and analytics. “For interest-sensitive policies such as universal life, the faster rates rise, the more likely policyholders will surrender their policies, potentially creating disintermediation risk for the insurer. Asset-liability management and enterprise risk management will be critical as we transition into a new environment.”
The report notes that with strong, new premium growth comes new business strain, because expenses are front-ended while returns are realized over time. This new business strain, along with notably higher reserve increases than historical levels and higher death benefit payments, resulted in the individual life market reporting a pretax loss of nearly $8 billion in 2021. Companies with premium growth of 5% or lower saw an average year-over-year net operating gain increase of 208%. Conversely, companies with premium growth of more than 20% saw a decrease in net operating income of 273%.
To access the full copy of this report, visit http://www3.ambest.com/bestweek/purchase.asp?record_code=321294.
For a video discussion about this report with Hopper and Helen Andersen, industry analyst, AM Best, go to http://www.ambest.com/v.asp?v=ambrsindividuallife622.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. For more information, visit www.ambest.com.
Am I missing something here? If interest rates increase, UL policies will more likely stay inforce. There is no reason to expect increase in surrenders