2021 outlook for life insurers stays negative, says Moody’s

Global economic recovery not enough to reverse pessimism on industry next year

2021 outlook for life insurers stays negative, says Moody’s

The outlook for life insurers in the U.S. next year is still firmly negative, according to Moody’s Investors Service.

In its annual report, the agency said that while the global economy is on a gradual path to recovery, current macroeconomic conditions point to a negative outlook that will persist next year.

Aside from a potential deterioration in the credit markets, companies are vulnerable to low interest rates, which are liable to drag down earnings.

“There are downside risks and upside drivers to our baseline forecast of a continuation of the current US recovery,” said Moody’s Vice President Michael Fruchter.

Despite the current excitement surrounding the progress made on candidate vaccines against the SARS-Cov-2 virus, the infectious agent that causes COVID-19, Moody’s anticipates that an effective vaccine is not likely to be widely available before mid-2021. Until that time, pandemic management will be crucial for a steady U.S. economic recovery to be sustained, it said.

“The earlier distribution of an effective vaccine is a potential upside to our scenario, as is continued sizeable fiscal and monetary policy support,” Fruchter said.

Before the global COVID-19 outbreak and succeeding economic shock, the U.S. life insurance industry was on strong footing. Years of low interest rates had contributed to a widespread strategic emphasis on risk management and strong capital levels.

According to Moody’s, the rebound in equity markets has bolstered those capital levels. Hedging programs to curb the impact of low interest rates had also worked in insurers’ favour.

But with stubbornly low interest rates, higher mortality claims, increased credit risk, and uncertainty in the equity markets all in play, the industry still faces the potential of more pressure. The historic weakness in interest rates, notably for longer-term debt securities, are a drag on insurers’ credit ratings as they threaten to dampen insurers’ earnings over time.

Interest-sensitive products face every possibility of reduced earnings due to spread compression, as already evidenced by sizeable blocks of the industry’s liabilities at minimum guaranteed rates.

The life insurance industry has undergone accelerated change due to low interest rates and the pandemic, with the pace of transactions rising from life insurers’ eagerness to let go of interest-sensitive legacy books.