Life insurance: Economic conditions and technology influencing 2023
“These are not only streamlining the carriers’ internal processes and helping reduce costs but also enabling companies to reach more people.”
But despite the industry making it easier for people to obtain coverage, “the life insurance need is still significant in this country,” Carroll added.
“In our data, we see that at least 4 in 10 households would face significant hardship within six months with the loss of a primary breadwinner. We’re thinking there’s over 100 million Americans who say they need or need more life insurance. So the need is tremendous.”
Carroll said the industry’s challenge is how to reach those uninsured and underinsured, especially when inflation and high interest rates mean families have less money to buy coverage. He said he expects life insurance sales could slowly tick upward if inflation slows down.
COVID-19 prompted a sense of urgency in people to protect their families, so life insurance sales saw a significant increase in 2021. But as economic challenges have replaced COVID-19 as being top of mind for consumers, “we’re seeing a settling down in life insurance sales,” Carroll said.
He predicted life insurance sales will stay around 2022 levels in the new year but will remain above pre-pandemic levels for the foreseeable future.
Flat sales in 2023, uptick in 2024
Whole life sales, which were strong in 2021, saw a drop in the mid-single digits in 2022. Carroll said one concern around whole life sales is that inflation is eating into the purchasing power of middle-market consumers who traditionally buy the product.
But if a recession occurs in 2023, it’s possible that whole life sales will improve, he added, as he looked back at the 2008-09 Great Recession.
“Going back to that time, we saw sales of whole life increase because not only were people looking for protection but also the guarantees that whole life offers were very appealing,” he said.
“We don’t know where whole life will go in 2023, but we certainly are seeing a softening. We expect to stay flat in 2023 and then in 2024 start to pick up again to a normal low-single-digit growth rate.”
Term life sales also are expected to slide in 2023 and then pick back up to pre-inflation levels, Carroll said, as consumers are more willing to spend money for coverage.
Variable universal life sales were up 73% in 2021 and continued to have a strong showing in 2022. Carroll predicted a leveling off in 2023 and then an increase the following year, “assuming the equity markets will stabilize next year and then continue to rise in 2024.”
Indexed universal life sales also are predicted to see a flattening in the coming year and an increase in 2024, although “at a more subdued, sustainable rate as opposed to what we’ve seen in the past two years,” Carroll said.
“Whole life and term are struggling relative to very strong 2021 numbers,” he said. “We see that sort of settling down and then see them coming back to a slow, steady growth rate going forward. And the UL space, again, growing dramatically, staying strong and picking up after potentially leveling off and absorbing some of that high growth of the past two years as we go forward.”
Interest rates give carriers flexibility
For years, a prolonged low-interest-rate environment “had a dramatic effect on life insurance carriers,” Carroll said. “It really put up “a tremendous number of barriers and forced some product innovation.” As interest rates rise, “those higher rates give a lot more breathing room to the carriers. There’s a lot more they can do.”
Carroll predicted interest rates will level off in 2023, which he said will lead to more product innovation in the future. “Interest rates that rise slowly and steadily are good, but spiking interest rates are not,” he said.
“When there’s a huge spike, carriers can’t address pricing issues and product development that quickly. What we do see is that interest rates will level off at a rate quite a bit higher than where they had been for the previous 10 years.
“That gives the carriers much more flexibility in their product design, in their product pricing. It’s attractive to have a stable and somewhat more predictable interest rate environment — that can be very positive for insurance carriers.”
Annuity sales keep booming
Although life insurance sales are expected to be flat in 2023, annuities are expected to keep booming after a record-setting 2022, Carroll said.
Higher interest rates are a main driver of higher annuity sales, he added. An aging demographic is another factor making annuities attractive.
“When you look at the annuity environment, you have this higher-interest rate environment that automatically makes certain products more attractive. But you also see the population aging, the 65-and-older group increasing.
“Annuities are generally attractive to pre-retirees and retirees because of the protection they offer and the upside they offer. And we see consumers moving toward protection as they see the kind of market volatility we have been experiencing. So consumers are looking for products that offer protection while offering upside.”
Variable annuities continue to struggle, Carroll said. LIMRA is projecting 2023 VA sales to be between $60 billion and $65 billion. “That sounds like a big number, but in 2007, we had more than $180 billion in VA sales.”
Other annuity products are competing with VAs for attention and investor dollars. One such product is registered index linked annuities, which continue to grow in popularity. “In this product, you get some of the benefits of the VA, but there is a guaranteed aspect of it that is a crediting rate,” Carroll said.
He predicted RILAs to hit around $40 billion in sales in 2022, and that number will increase in the coming year.
Fixed annuities “will continue to be the big story in 2023,” Carroll said. Coming off of 2022, when sales hit nearly $100 billion, fixed annuity sales will continue to be strong in the current year, although maybe not quite at this year’s level.
“It’s simply because interest rates have gone up and you see carriers much more responsible and flexible on raising rates quickly on their products. When you see the environment where certificates of deposit and money market funds have been yielding less than half of a percent, and then they you look at rates of 4% or 5% on some annuities, that’s going to attract a lot of attention.”
If interest rates go down, then annuity rates will go down as well, Carroll said. “So I think it will be a question of when people continue to pour money into annuities before rates peak and maybe start to head down.”
Fixed indexed annuities also hit record sales in 2022, and Carroll said he expects growth to be driven by an opportunity to lock in higher interest rates before rates begin to fall.
Income annuity sales are rebounding from pre-pandemic levels, and Carroll predicted steady growth of that product sector over the next three to five years, again with aging demographics and higher interest rates driving that growth.
“It’s a very good environment for people who are looking to use an income annuity as part of their retirement income plan,” he said. “It really comes down to whether the equity markets can settle down and rates settle in above where they’ve been for the past decade — you’ll see a strong environment for annuity sales going forward.”
Health insurance: A stable outlook
Health insurers are entering 2023 with the worst of COVID-19 behind them. But they are keeping an eye out for a possible recession after being hit with high inflation, especially pertaining to increased costs of care and higher salaries for health care workers. In addition, health insurers faced increased consumer health care usage after people deferred receiving care at the height of the pandemic.
That was the word from Brad Ellis, senior director at Fitch Ratings, who said “the health insurance market has been relatively stable even in the face of what we thought would be a strong test of its resilience.”
But the health insurance industry is facing headwinds from a possible mild recession hitting in the second and third quarters of 2023, Ellis said. Recession typically leads to lower enrollment for group health insurers as the unemployment rate goes up.
In addition, inflation is a factor that could impact health insurers’ bottom lines in 2023, as most aspects of care cost more and the health care industry is hit with a continued worker shortage and demands for higher wages.
Ellis said he does not expect inflation to hurt health insurers in the coming year.
“Health insurers typically have contracts with hospital systems that are three years in term. So when they review those contracts, that’s when they agree to higher payment rates. So for right now, the health insurers aren’t facing the inflationary pressures that the hospitals are. But that will slowly change over the next few years. And we all pay that in our health insurance premiums as well.”
But health insurers have an advantage in dealing with inflation, he added. “Because they have sort of a heads-up to this inflation, they can factor that into premium rates before they actually have to start paying out claims. So it gives them a little bit of a head start. This is supporting more stability in health insurers.”
Diversification is one factor that is contributing to health insurers’ stability, he said, pointing to the number of carriers offering Medicare plans as an example.
“If you look over the past decade, the proportion of the total enrollment of the large health insurers that is made up of Medicare business has grown. So that helps because the Medicare business is extremely resilient. It’s government funded and not impacted except in an extreme case. So that is helping carriers in terms of offsetting some of the loss from the group medical side,” he said.
More states are privatizing Medicaid, and that will mean more opportunities for health insurers to increase their business through managed care, he added.
More choices for consumers
Consumers who purchase individual health coverage through the Affordable Care Act exchanges will find more choices available to them as more carriers find ways to be profitable in that market, said Tara Straw, senior health advisor at Manatt Health.
After several years in which consumers in many areas of the country could find only one carrier offering ACA coverage in their county, more carriers have filled the void for 2023.
“People absolutely have more choices. It has been a very stable marketplace,” she said. “With the exception of COVID-19 disruption, it was a lucrative marketplace for some insurers in the couple of years prior to COVID-19 and in the first year of COVID-19. That stable place for insurers to be has drawn in more insurers.”
Straw said enhanced premium tax credits that enabled more people to obtain coverage through the ACA marketplace also benefited insurers that offer coverage there. “Because not only are more people choosing to get coverage through the marketplaces, but also it’s easier for them to stay in that coverage,” she said. “One of the complaints that insurers have had about the marketplace is that people get into coverage and then drop it until they need it again.”
“Now, if you have more people who have zero-premium plans, they won’t go into arrears on premiums,” she continued. “So the more people you have in these zero premium plans, it becomes a more stable market for carriers. I believe the carriers have recognized that, and that’s why they are coming into the marketplace for every area of the country.”
The Great Unwinding will have an impact
The end of the COVID-19 public health emergency is expected sometime in 2023, and that will trigger what some call The Great Unwinding.
The Great Unwinding is how the Centers for Medicare & Medicaid Services refers to the undoing of many health coverage requirements and incentives put into place as a result of the COVID-19 public health emergency declaration and related legislation. When the public health emergency declaration ends, millions of Americans are at risk of losing Medicaid or ACA coverage.
According to an analysis by the Kaiser Family Foundation, an estimated 5.3 million to 14.2 million could lose their Medicaid coverage when the COVID-19 public health emergency ends.
Straw said The Great Unwinding will impact both ACA health insurance and employer-based insurance.
“How will people transition into employer-sponsored coverage if they’re eligible for that? Will employers be ready for that influx of people? Do employers — especially employers of low-wage or moderate-wage workers — understand that there will be an influx of people, or will they be aware of the number of people who could request special enrollment periods?”
The family glitch is fixed
In October, the Biden administration issued a rule that addressed what is known as the family glitch under the ACA.
Under the glitch, families were unable to qualify for ACA-subsidized health insurance when one member received coverage from his or her employer that was considered affordable — even if the cost of covering the entire family was unaffordable. The employee-only definition did not take into consideration the fact that the cost of family-based coverage is usually much more than the cost of employee-only coverage.
Straw said fixing the family glitch will drive more people to the ACA marketplace.
“For employers, they will potentially lose some people out of their risk pool who do not have an offer of affordable family coverage and will decide to go into the marketplace,” she said.