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State of the Life Insurance Industry
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State of the Life Insurance Industry,Implications of Industry Trends. Anne Obersteadt,Larry Bruning Greg Niehaus,Brenda Cude Eric Nordman. Kris DeFrain Bruce Ramge,Brian Fechtel Guenther Ruch. Shanique Hall Karen Schutter,Dimitris Karapiperis Daniel Schwarcz. Andrew Melnyk Jeremy Wilkinson,Reggie Mazyck, This CIPR Study presents research whose purpose is to inform and disseminate ideas to regulators.
academics and financial service professionals, The mission for the CIPR is to serve federal and state lawmakers federal and state regulatory. agencies international regulatory agencies and insurance consumers by enhancing. intergovernmental cooperation and awareness improving consumer protection and. promoting appropriate marketplace competition, Disclaimer This study represents the opinions of the author s and is the product of professional. research It is not meant to represent the position or opinions of the NAIC or its members nor is it the. official position of any staff members Any errors are the fault of the author s. CIPR Study S 2013 Date August,NOTE TO READERS, This is the final release of the study in its entirety as one document This study is organized in. six sections each of which consist of distinct essays by contributing authors both internal and. external to the NAIC NAIC CIPR staff state regulators academics and industry. representatives covering a broad range of issues having profound and transformative. implications for the life insurance industry The sections explore how the industry has evolved. over time the nature of regulatory responses the changes in product offerings and technology. and the challenges of the economic environment, The first section the Evolution of Life Insurance traces the history of life insurance from the. 18th century to the present time The second section Current and Emerging Product Trends in. Retirement and Long Term Care Markets discusses how insurers are meeting the increased. need for retirement products The third section The Impact of Technology on the Life Insurance. Industry discusses the impact of emerging technologies on the life insurance industry The. fourth section Life Insurer Balance Sheets looks at financial performance of the life insurance. industry over the last decade and provides an in depth look at the 2011 numbers to give a. snapshot of the industry s sound financial position today The fifth section Implications of. Economic and Market Changes on Life Insurers highlights the important role life insurers play in. the economy and covers the impact of the recent global financial crisis on the industry with a. special focus on the low interest rate environment The sixth section Meeting the Risks of the. New Environment explores risk management in the context of the changing and complex. environment, Larry Bruning International Life Actuary Financial Regulatory Affairs International NAIC.
Brenda J Cude Professor of Housing and Consumer Economics University of Georgia. Kris DeFrain Director Research and Actuarial Services NAIC. Brian Fechtel CFA Agent and Founder Breadwinners Insurance. Shanique Hall Manager CIPR NAIC,Dimitris Karapiperis Researcher CIPR NAIC. Andrew Melnyk Vice President American Council of Life Insurers. Reggie Mazyck Life Actuary Research and Actuarial Services NAIC. Greg Niehaus Professor of Finance and Insurance University of South Carolina. Eric Nordman Director Regulatory Services and CIPR NAIC. Anne Obersteadt Senior Researcher CIPR NAIC, Bruce Ramge Director Nebraska Department of Insurance. Guenther Ruch Principal GHR Consulting LLC, Karen Schutter Executive Director Interstate Insurance Product Regulation Commission. Daniel Schwarcz Associate Professor University of Minnesota Law School. Jeremy Wilkinson Senior Manager Communications NAIC. Acknowledgements The authors are grateful to those that reviewed and contributed to the. study and helped improve it with their insightful comments Special thanks to former NAIC CEO. Terri Vaughan from whom the concept of this study originated Additional thanks goes to other. NAIC staff particularly NAIC COO and CLO Andy Beal Jennifer Cook Jolie Mathews and Ethan. Sonnichsen Government Relations Office Dan Daveline Dave Fleming Bruce Jensen Jane. Koeningsman Robin Marcotte and Todd Sells NAIC Financial Regulatory Services Department. Randy Helder and Craig Leonard NAIC Market Regulation Department Dave Keleher NAIC. Research and Actuarial Services Department Ed Toy NAIC Capital Markets Bureau and Pamela. Simpson NAIC Regulatory Services for her editorial help The authors also thank NAIC Members. Jim Mumford IA and Steve Caughill WI as well as James W Schacht The Schacht Group for. their invaluable comments on the draft released at the CIPR Life Insurance Symposium October. Executive Summary 1,Historical Evolution of Life Insurance 5. Life Insurance Industry in its Infancy 6,Economic Turbulence of the 19th Century 6.
State Regulation is Born 7,Life Insurers Dominate the Financial Markets 8. The Armstrong Investigations Restrict Insurers Role as Financial Institutions 8. Growth and Confidence Restored Through Regulation and Legislation 9. Life Insurance Sales Soar with the Roaring 1920s 10. The Great Depression Pressures Life Insurers 10,Commercial Banks Repeat Life Insurers Mistakes 11. Federal Regulatory Investigations 12,Federal Regulations Reform the Economy 12. Banking Reforms 13,Insurance Reforms 14, Consumer Demand Shifts to Long Term Security in the Golden Age 14. Consumer Protections 16, Insurers Innovate into Investment Oriented Products to Keep Pace with High Interest Rates 16.
Birth of Universal Insurance and Variable Insurance 17. Variable Annuities 18, High Insurance Lapse Rates Lead to Stronger Insurance Regulations 21. High Interest Rates Spark Deregulation of Financial Institutions 22. The Financial Services Modernization Act 24,Consolidation of the Life Insurance Industry 25. Demutualization 26, Insurance Regulators Respond to the Financial Services Modernization Act 28. The Rise of Derivatives and the Commodity Futures Modernization Act CFMA of 2000 29. Insurers Enter the Twenty First Century 30,Recession of 2001 31. Insurers Return to Growth and Core Competencies 32. Insurers Turn to Alternative Funding Mechanisms for Statutory Relief 32. Suitability and Disclosure of Annuities 33,Contingent Commission Practices Investigation 34.
Global Financial Crisis 35,Systemic Risk Intervention 36. Lessons Learned from the Financial Crisis 37, Dodd Frank Wall Street Reform and Consumer Protection Act 38. Solvency Modernization Initiative 39, Current and Emerging Product Trends in Retirement and Long Term Care Markets 41. Introduction 42,Longevity Risk and Insurance 44, The Growing Need for Retirement Products Provided by Life Insurers 45. Annuities in Pensions 55,Pension Risk Transfer 58,Contingent Deferred Annuities 61.
Regulatory Implications of the Risks Inherent in Longevity Products and Transfer Mechanisms 62. The Growing Need for Long Term Care Insurance 67, Insurance Regulatory Perspectives on Long Term Care Insurance 76. The Impact of Technology on the Life Insurance Industry 86. Internet and Mobile Technology and the Life Insurance Industry 87. Barriers to Insurers Use of the Internet for Product Distribution 91. Implications of Emerging Technology on Insurance Regulation 94. Life Insurer Balance Sheets Description and Issues of the Past Decade 99. Introduction 100,Framework Terminology and Data 102. The Life and Health Insurance Industry in 2011 104. Capital to Asset Ratios Vary with Company Size and Line of Business 110. Medium Size Accident and Health Capital to Asset Ratios Trend Lower 113. NAIC RBC Ratios 2001 2011 116, Changes in Capital During and After the Financial Crisis 118. Conclusions on Life Insurer Balance Sheets 121, Implications of Economic and Market Changes on Life Insurers 125. Insurers Place and Key Role in the Economy 126,Impact of Financial Crisis 127.
Current Economic and Market Environment 132, The Challenges of the Low Interest Rate Environment 135. How Do Life Insurers Counter Low Interest Rates 139. The Risk of a Spike in Interest Rates 141,NAIC Low Interest Rate Study and Methodology 142. Meeting the Risks of the New Environment 147,Introduction 148. The Importance of Group Supervision 150,The Need for Stronger Corporate Governance 155. The Significance of Enterprise Risk Management 160. Ensuring Capital Adequacy in the New Environment 163. Implications of the Interstate Insurance Product Regulation Commission 172. Opportunities for Better Collaboration between State and Federal Regulators 173. Market Conduct Better Analytical Tools 175, The Legal Entity Identifier LEI Improves Financial Transparency 181.
Enhancing Transparency 182,Conclusion 195,References 199. Appendices 205,Executive Summary,Executive Summary. Executive Summary, Insurance regulation is a dynamic ever evolving exercise to achieve an appropriate balance. between providing adequate consumer protection and allowing the free market to operate. unconstrained Since insurers and the products they offer change over time it is imperative for. the regulatory framework to keep pace with industry dynamics This study explores areas. where the life insurance industry has changed over time through different product offerings. globalization evolving technology and changes in the economic environment Additionally the. study examines the regulatory responses to the growing complexity brought about by these. changes The study provides a framework to assist regulators in assessing which changes have. been successful which need improvement and what needs to be addressed in the future. Executive Summary, The study begins with the Evolution of Life Insurance an examination of how the life insurance. industry in the United States has evolved over time The rise of the mutual insurer model is. covered along with early efforts to regulate the industry including the creation of the National. Association of Insurance Commissioners NAIC In the late 19th century large insurers. dominated the marketplace and controlled large amounts of money not backed by reserves. They used these funds to purchase controlling shares of banks and other businesses These. excesses led to the 1905 Armstrong investigations in New York The Armstrong investigations. caused the pendulum to swing toward heavy regulation with life insurers prohibited from. owning common stock underwriting securities and paying excessive commissions to agents. Deferred dividend plans also went by the wayside The pendulum moved back slightly in the. early part of the 20th century leading to a growth cycle for the life insurance industry Group. annuities were introduced in the 1920s along with other product innovations A major. competitor in the form of the federal government also found its way into life insurance markets. with the offering of War Risk Insurance to members of the armed forces Life insurance sales. grew in the 1920s and as a result of the regulatory restrictions stemming from the Armstrong. investigations life insurers did not suffer to the extent banks did during the stock market crash. Congress was interested in addressing the causes of the Great Depression The result was the. Banking Act of 1933 commonly known as Glass Steagall that separated commercial banks and. investment banks from each other and from insurance and investment firms Insurance reform. occurred in the early 1940s when a U S Supreme Court case U S v Southeastern Underwriters. overturned the long held opinion Paul v Virginia insurance was not a form of interstate. commerce Congress enacted the McCarran Ferguson Act to allow states to continue to. regulate and tax the business of insurance despite its new status as a form of interstate. Executive Summary, commerce The prosperity following World War II along with the certainty of government.
programs such as Social Security led to a shift in insurance product demand toward products. offering more long term investment opportunities The 1980s saw the introduction of universal. life insurance and variable life insurance products Consolidation and demutualization were the. buzzwords of the day and as a result of the Gramm Leach Bliley Act of 1999 banks insurers. and securities firms were once again allowed to affiliate and cross sell products and the. concept of functional regulation was introduced The 1990s through the early 21st century were. characterized by strong sales and profitability The Commodities Futures Modernization Act of. 2000 was adopted It deregulated over the counter derivatives and allowed financial services. firms to invest in a wide variety of derivatives some of which turned out to be very risky In. particular the introduction of the credit default swap proved to be hazardous to the financial. markets generally When combined with the bursting of the housing bubble the result was the. global financial crisis of 2007 2008, The study looks at the impact of life insurance product trends in the Current and Emerging. Product Trends in Retirement and Long Term Care Markets section There are two key factors. driving life insurance product development mortality risk and longevity risk Traditional life. insurance products like term and whole life were intended to address mortality risk more. specifically the risk one dies prematurely Their primary purpose was to provide a safety net for. families when one of the primary breadwinners passed away In recent years the focus has. shifted to address longevity risk as the baby boomers reach retirement age in a time when the. defined benefit pension plan has become a relic of the past As the general health of the. population improves over time people are living longer The blessing of a longer life is. accompanied by the need to generate sufficient income in retirement to be able to enjoy the. extra years and pay for long term care when health status declines Life insurers are. increasingly targeting product development to meet this need. The Impact of Technology on the Life Insurance Industry section explores how technological. advances and consumer preferences are shaping product design and sales The Internet was. initially used by insurers to promote their brand and provide some general communications. Increasingly it is used to recruit insurance producers and actually conduct the business of. insurance Access to the Internet using mobile devices is rapidly changing the environment. again Insurers are beginning to explore how to use social media such as Facebook and Twitter. Monitoring insurer activity in this emerging area is becoming a challenge for insurance. regulators The individualization of the social media experience presents many compliance. conundrums for insurers and regulators,Executive Summary. The Life Insurer Balance Sheets section looks at the financial performance of the life insurance. industry over the last decade As a decade with significant upheaval and economic turmoil it is. a credit to the conservative nature of the life insurance industry and the diligence of insurance. regulators that the life insurance industry significantly outperformed the banking industry. during the decade The conservative regulatory framework was a major contributing factor to. the success of the industry during the period An in depth look at the 2011 numbers is provided. to give a snapshot of the industry s sound financial position today. The Implications of Economic and Market Changes on Life Insurers section discusses how life. insurers have responded to the current economic and market volatility The role life insurers. play with respect to the overall economy is discussed as is the industry s role as institutional. investors The section also covers the impact of the recent global financial crisis on the industry. and the impact of the low interest rate environment on life insurers. The Meeting the Risks of the New Environment section addresses risk management in the new. environment It covers the importance of Enterprise Risk Management ERM and the role of. the new Own Risk Solvency Assessment ORSA tool required of many insurers starting in 2015. The influence of the international community is discussed with respect to group supervision. The section also covers market conduct activities of regulators with an emphasis on new. market analysis tools being used to target regulatory resources Regulators use a number of. tools to ensure capital adequacy for life insurers The chapter evaluates the evolution from a. rules based to a principle based regulatory system The appropriateness of both capital and. reserves are covered Reserving requirements are evaluated to determine whether the rules. lead insurers to establish appropriate reserves for the products being sold Suggestions for. improvement are included along with a discussion of the role of regulators to improve. transparency through consumer disclosures,Historical Evolution of Life Insurance. Historical Evolution of Life Insurance,Historical Evolution of Life Insurance. Historical Evolution of Life Insurance,By NAIC Staff.
Life Insurance Industry in its Infancy, The life insurance industry has gone through several periods of transformation instigated by. key historical events and changes in consumer needs The Presbyterian Ministers Fund. established in 1759 was the first life insurance entity in the United States 1 Although its. purpose was to provide life insurance to the widows and orphans of deceased ministers. negative perceptions surrounding assigning a monetary value to one s life during this time. period stifled growth 2, Legal restrictions also presented a barrier to life insurance sales during this time Many states. barred women from entering contracts including insurance policies or legally inheriting an. estate As such a wife would not be able to collect proceeds from her husband s policy. Furthermore spousal or dependent relationships alone did not meet the monetary insurability. interest requirements insurers of this time period required In addition to limiting who could. take out an insurance policy insurers also placed stringent requirements on the activities of. policyholders These requirements usually limited travel to healthier regions of the country. required regular health and character checks and prohibited the consumption of alcohol 3. Economic Turbulence of the 19th Century, Complicating things further was a five year depression brought on by the Panic of 1837 Land. speculation driven mostly by western territory sales fueled by loose credit from state banks. had created a real estate bubble and high inflation 4 In response President Andrew Jackson. issued the Specie Circular in 1836 limiting payment of land to gold and silver 5 The state banks. had overextended their lending abilities by printing money beyond their reserves resulting in. bank and business failures real estate losses and record high unemployment levels 6 These and. similar sequences of events would play out several times throughout history including three. more times in the latter part of the 19th century, Murphy Sharon Life Insurance in the United States through World War I EH Net Encyclopedia. 1798 1899 Presbyterian Ministers Fund records Collection 3101 The Historical Society of Pennsylvania From. http hsp org sites default files legacy files migrated findingaid3101presbyministers pdf. Murphy Sharon Life Insurance in the United States through World War I EH Net Encyclopedia edited by. Robert Whaples August 14 2002 URL http eh net encyclopedia article murphy life insurance us. McNamara R n d Financial panics of the 19th century Retrieved from. http history1800s about com od thegildedage a financialpanics htm. Panic of 1837 Ohio History Central July 1 2005 http www ohiohistorycentral org entry php rec 536. Historical Evolution of Life Insurance,State Regulation is Born.
Insurers unable to raise sufficient capital to form as a stock company following the Panic of. 1837 mutualized instead 7 A mutual company is owned by its policyholders as opposed to. stockholders Mutual insurers have less stringent capital requirements and higher reliance on. premiums from policyholders also owners for cash flow To increase premiums mutual. insurers launched a very successful marketing campaign promoting ownership benefits. essentially policyholders as owners of the company would share in the company s profits. through dividends or reduced premiums 8, The ease of starting up a mutual insurance company combined with the appeal of policyholder. dividends produced a plethora of new entrants into the marketplace Eventually the market. became saturated and insurers began using fraudulent activities to increase market share New. York responded to this fraudulent activity by instituting capital stock 1849 and depository. 1851 regulatory requirements 9 New Hampshire appointed an insurance commissioner in. 1850 10 Massachusetts implemented legal reserve principles and formed a state insurance. department to oversee these new laws 1858 11 Soon other states were following suit with. most states implementing regulatory oversight of insurers by the early 1870s 12. In 1868 the Supreme Court decision in Paul v Virginia securely placed insurance under the. supervision of states Soon after in 1871 the National Insurance Convention later known as. the National Association of Insurance Commissioners NAIC was formed to address the need. to coordinate regulation of multistate insurers Although the new state regulations slowed. industry growth for the next decade they also restored consumer confidence Additionally. legislative changes during this time allowed women access to insurance and instituted. consumer friendly nonforfeiture laws 13 Stability returned the growth to the United States. economy which was growing more industrial and prosperous The resulting rise in demand. coupled with the changes in legislation insurer structure and marketing practices set the stage. for future industry expansion, Murphy Sharon Life Insurance in the United States through World War I EH Net Encyclopedia edited by. Robert Whaples August 14 2002 URL http eh net encyclopedia article murphy life insurance us. Insurance the U S Economy Best Insurance Education Company Retrieved from. http www bested com studyguides NMIL IUS NMIL IUS pdf. Poterba James M The History of Annuities in the United States April 1997 NBER Working Paper No w6001.


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