The Insurance Industry Is Finally Stabilizing

Recently, Moody’s Investors Service upgraded the stability rating of the U.S. life insurance industry. Only time will determine if its upward trend can stay steady.

Moody’s evaluated a number of changes before granting the improved rating. The nationwide shift towards overall economic stability has encouraged U.S, citizens to buy more insurance in recent months.

Households are regaining discretionary funds, which are frequently used to contribute to long-neglected-but-long intended investments like life insurance. Now that the economy has started to show signs of revival, higher life and annuity premiums, along with increased deposits into pension plans, are again possible. In turn, these contributions ease pressure on insurance company revenues and earnings. Rising interest rates are also alleviating pressure on life insurers’ profit margins. With higher rates, fixed annuities and universal life insurance face less compression. Long-term investments inch closer to reserve.

Equity markets also appear to be following an upward trend, which improves the performance of variable annuities and other assets under management-fee-driven businesses. These improvements spread to improve the chances that variable annuity portfolios are likely to increase in profitability. As pension plan fees rise in response to the stimulated market, mutual funds should also increase. However, some volatility should still be expected, as those insured will always cease payment of premiums and take advantage of any guaranteed benefits.

Moody’s forecasts that the U.S. economy will continue to improve in 2014 and 2015; in current figures, the company expects an uptick of 2 to 3 percent in 2014 and of 2.5 to 3.5 percent in 2015. These increases are the result of a perceived improvement in the unemployment rate and the housing markets. In partnership with the comebacks in these two sectors, Moody’s foresees an increased demand for annuity and life insurance products. Fixed annuity rates are already slowly beginning to improve their poor performance of the past few years.

While the promise of a brighter market is cheering, approach this (and any) good news with due caution. Not all insurance products will improve. For example, sales of health-related products are predicted to remain depressed, as they are also tied to the volatile recent developments in healthcare reform. Similarly, some types of coverage, including disability, are likely to take a longer time to show any improvement.

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