< Previous28BEST’S REVIEW • NOVEMBER 2022 Life Insurance Rising Interest Rates Expected to Bring Shifts to In-Force Life and Annuity Products With the Federal Reserve in an aggressive rate-raising mode for the first time in a decade, its moves could create a fault line between newly issued life and annuity products. After years of shifting to products that are less interest- sensitive, the industry may also see a move the other way. by Terrence Dopp R ising interest rates are bringing mixed news for life and annuity insurers. After a decade of historic lows, interest rates are rising and the pattern could hold for a bit, allowing them to hold their own on balance sheets. It could also likely mean some portion of the Terrence Dopp is a senior associate editor. He can be reached at terry.dopp@ambest.com Key Points Development: Spurred by rising inflation, the Fed has been raising rates throughout 2022 and may continue doing so into next year. In-Force: While the development may at once be music to the ears of the industry, it also comes after years of shifting toward registered index-linked annuities and other life products that bring less exposure to interest rates. Future: While it’s too early to tell exactly what impact that shift will have, change is the one constant of economics.29BEST’S REVIEW • NOVEMBER 2022 more than $3 trillion in policies they wrote in 2021 could be impacted. The question is how that plays out and what impact it has on those in-force products issued during a decade of low rates. “It’s positive for the industry on their own balance sheets but it will also make certain fixed annuities and life products like universal life more attractive,” said Thomas Holzheu, Swiss Re’s chief economist for the Americas. “These higher rates allow insurers to also re-price and offer new products on more attractive terms. That’s particularly relevant for savings and accumulations types of products.” Holzheu said rising rates are significant for the entire insurance industry and could result in shifting product mixes, which he said the industry has proven to be adept at altering when reacting to interest rates. He said changes have been primarily clustered on the life and annuity side in recent years. “They are long-term investors and so overall it’s a positive development,” he said. In September, the Federal Open Market Committee of the Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point to a 14-year high. Crucially, Fed Chairman Jerome Powell said the hikes would continue for the remainder of the year and stretch into 2023. Andrew Melnyk, vice president of research and chief economist at the American Council of Life Insurers, said that for many life insurers a smooth rate trajectory would be preferable. He called the rates set recently by the FOMC a “blip in time” given the industry’s longer-term focus. “A more gradual increase in interest rates would allow companies to adjust assets in a more efficient and effective manner,” he said. “Even so, life insurers’ assets are designed to deliver guaranteed benefits that could come due 20 or 30 years down the road.” In many real respects, the current interest rate environment—dubbed higher-for-longer—is the exact opposite of the preceding decade, in which the term-of-art was “lower-for-longer” as rates stayed artificially low in the wake of the 2008 financial crisis. The increases are meant to throttle inflation and cool the economy. The trick will lie in cutting the balance with enough of a shock to tame inflation but not so much that the fallout plunges it into a deep retraction. As of now, the Fed is predicting a rise in unemployment to 4.4% in the coming year along with gross domestic product growth of 1.2%. Life and annuity carriers stepped up other areas of investment as they searched for yield, with movement toward private placement lending, collateralized loan obligations and other classes that often trade liquidity for higher returns. Holzheu indicated that the increased interest rates are positive, although he said softening of the labor market and a likely recession could mean the life insurance industry sees a sales slowdown in 2023. “You have to live through 2022 and 2023 with a lot of volatility on asset returns,” he said. Along the way there could be some choppiness for insurers, he said. The simplest term policies will largely not see any impact; however, with accumulation-centered policies, that could change with an impact on both future policies and those currently on the books. Michael Porcelli, a senior director with AM Best, said the trajectory of the rate increases is what will determine how great the impact is on existing books of business in the short run. “Rising rates in the long run are good but rates that rise too quickly can be disruptive and troublesome for the industry,” he said. “The reason for that is that there are interest-sensitive liabilities with policyholder optionality that could force asset sales at a time when rates have risen.” For example: Someone with a universal life policy or anything with an accumulation component could decide to turn it in and take their premium money somewhere with higher interest crediting. While predicting how future product mixes shift is speculative at this point, both Porcelli and Holzheu cited this as a possible outcome. Life Insurance Life insurers industrywide issued more than $3 trillion worth of business in 2021, a decrease of 0.9% from the prior year, showing stability even as the U.S. economy began to shake off the roller-coaster ride of COVID-related shutdowns, according to a Best’s Ranking of the industry. As rates started rising in 2022, the virus-caused Life Insurance 30BEST’S REVIEW • NOVEMBER 2022 growth in life business began to slow down. The same pressures that have prompted the Fed’s fight—a consumer price index that’s risen at 40-year highs—have also impacted another side of the industry as consumers felt the financial pinch of higher costs and, in some cases, let policies lapse that seemed crucial during the height of the pandemic. According to industry tracker LIMRA, total U.S. life insurance new annualized premium increased 11% in the first half of 2022 compared to one year earlier, with variable life driving the increase. Yet, underneath the headline figure, overall policy sales fell 9% year-to-date as financial pressures cut into family budgets. The shift was already taking place as the first half of the year came to a close. New annualized premium in the indexed universal life segment—which accounted for about 28% of the life insurance market—increased by 33% in the first half of the year driven by cash- value accumulation products. Variable universal life is 13% of the life insurance market and increased by 38% in the six-month period. Results for whole life products were a bit softer. New annualized whole life premium—which saw a 25% increase in the second quarter of 2021 as the pandemic raised awareness— increased by only 3% in the first half of the year despite registering a 3% drop as the rate increases began. Whole life accounts for about a third of the life insurance market. Sales of term life products, which make up 19% of the market, fell 4% in early 2022. Porcelli said if the current environment unfolds in traditional ways, it’s possible for life insurers to see new market entrants into the most interest- sensitive lines after years of carriers trying their best to become less sensitive to rate fluctuations. “It creates opportunities for companies that were on the sidelines,” he said. “They can start with a newer and cleaner portfolio that is already going to be yielding higher. But for that to happen there’s got to be a view that we’re at the top of the interest rate cycle and we don’t know when that’s going to happen.” Annuities On the annuities side are two widely divergent categories: fixed-rate annuities—in which a customer contracts to hand over money with a set return—and variable-rate products that can slide depending on set factors or conditions. Perhaps the most interest-sensitive product of all are fixed annuities. Porcelli said rising rates can entice new market entrants and the attractive rates they’re able to offer consumers can have a big impact industrywide after years marked by a shift to lower guarantees. “Some of the new entrants can have very clean balance sheets and are able to offer higher crediting rates,” he said. “The legacy players were competing for business in a lower-rate environment. So you’ve got that on the fixed side.” On the variable annuity side, companies may find that as the rates rise and stocks fall some equities-linked variable annuities are “in the money” and as a result carriers need to cover losses, he said. The same products that were “Rising rates in the long run are good but rates that rise too quickly can be disruptive and troublesome for the industry.” Michael Porcelli AM Best31BEST’S REVIEW • NOVEMBER 2022 increasingly common in the days of lower rates, such as registered index-linked annuities and others with a loss-buffer, could be less attractive to insurers. “They’re not going to transact unless they want to take a loss,” Porcelli said. “A lot of them are thinking they don’t want to transact right now.” Holzheu of Swiss Re said the fixed products have the most to gain as rates go up, attracting a mix of both rollovers at the higher levels and enticing new money. A reversal may be in store for the movement away from fixed products, he said. “That will be a reflection of a shift in asset allocation in general. We had a decade or more of suppressed rates and any fixed-income investment was less attractive,” Holzheu said. “You can earn a return on simple fixed-income investment with fixed-rate annuities. They have been unusually unattractive for over a decade and now things are coming back.” Variable annuities, if linked to equities, at the current moment appear “dire” from the consumers’ view, he said. “Fixed income and fixed returns look like a safe haven,” Holzheu said. “There’s a risk-averse sentiment regarding the equity-type investment. On the other hand, safe havens are starting to earn real returns and that drives some of this shift back.” Looking ahead, Roger Crandall, chairman, president and chief executive officer of Massachusetts Mutual Life Insurance Co., said his company over the past year brought out a host of newer life and annuity products that are at the core extensions of existing ones. While the company currently deals primarily with whole life and term products, he said the mix of those products could shift if needed to address changes brought on by rising rates. Massachusetts Mutual Life Group is the fourth-largest U.S. life/health insurer based on 2021 admitted assets, according to AM Best. “Particularly, you’ll have to be updating pricing very rapidly on annuities given the level of rate moves we’re seeing—it’s not unusual now to have moves in a day that you might not have seen in a month all that long ago. You need to make sure you’re quick on your pricing there,” he said. “If the yield curve inverts and stays inverted for a while, we certainly do manufacture universal life products and that may be a bigger part of the market.” The current picture is quite different from previous models: Rates have bounced up and down in the past, but now they are rising after a decade of being held at unusually low levels, industry leaders and analysts say. As a result, the true shift could be put off to the future as all sides of the transaction wait to see just how high they will rise. On top of that, the low starting point means that even with the increases interest rates just aren’t anywhere near approaching historical highs, Porcelli said. He said the industry looks completely different than it did in the late 1970s or early ’80s when the Fed was in sustained increase mode. “The industry definitely does react to interest rates in its product offerings,” he said. “The historical record is not going to be as interesting as what happens now because the product offerings in the past weren’t anywhere near as complex as they are now.” BR “You can earn a return on simple fixed- income investment with fixed-rate annuities. They have been unusually unattractive for over a decade and now things are coming back.” Thomas Holzheu Swiss RePowered by AM Best’s Experience and Knowledge ȼˏ4 !(ȥ /! ˏˏ0 010+.5ˏ˛(%*#ˏ/+"03 .! ȼˏ*ˏ! /5ȥ0+ȥ1/!ˏ%*0!." !ˏ"+.ˏ 1. 0!ˏ * ˏ!˝ %!*0ˏ/0 0!)!*0ˏ,.!, . 0%+* ȼˏ.+"!//%+* (ȥ(++'%*#ȑˏ-1 (%05ˏ+10,10 ȼˏ '! ˏ 5ˏ ˏ!/0Ȟ/ˏȆȇȅɌˏ5! ./ˏ * (56%*#ˏ%*/1. * !ˏ 0 ELECTRONIC STATEMENT PREPARATION Our Insight, Your Advantage ™ Learn More: bestesp_sales@ambest.com (908) 439-2200 22.ESP04FSpecialty Coverage 33BEST’S REVIEW • NOVEMBER 2022 AM Best TV Visit www.bestreview.com to watch the full lineup of programs in Succeeding in the New Age of Specialty Coverage. Richard Augustyn Geof McKernan Christopher MeeMartin WeenJoel Cavaness Jeremy Hitzig Heidi Strommen Matthew PowerHank Watkins Succeeding in the New Age of Specialty Coverage Insurance executives and industry experts discuss the advantages of specialization and how the industry identifies and develops new opportunities. Troy Korsgaden Contents Making the Move From Generalist to Specialist Page 34 Prospecting for the Next Great Risk Opportunity Page 37 With Specialization Comes Responsibility Page 40Specialty Coverage 34BEST’S REVIEW • NOVEMBER 2022 Making the Move From Generalist to Specialist The old days of one person being able to deal with all of a customer’s insurance needs have gone by the wayside. by Lori Chordas A s brokers, managing general agents and others look to grow their businesses, many are finding a niche in transitioning from being a generalist to a specialist, insurance industry experts say. They’re doing this to increase efficiency, credibility, retention and revenue. Geof McKernan, chief executive officer, NSM Insurance Group; Troy Korsgaden, founder and principal, Korsgaden International and author of the book Specialization: The Master Key to Agency Transformation ; and Richard Augustyn, founder and chief executive officer, NIP Group, took part in an AM Best panel discussion entitled “Making the Move From Generalist to Specialist.” Following is an edited transcript of their conversation. There’s been a lot of talk about specialization over the years. What are the benefits? Why is it so important for brokers, agents and others to transition from taking a one-size-fits-all approach to becoming a specialist? Augustyn: Specialization allows agents, brokers and MGAs to set themselves apart from their competitors, far beyond the table stakes. Whether the specialization is at the line of business level, at the industry level, or even at a region, it gives them a unique competitive advantage—what you might want to call a sustainable right to win. That’s very important when you only earn a commission if you’re successful. A broker recommends you or a customer selects you. Why do you feel that specialization is important? Would you say the generalist structure perhaps no longer suits today’s insurance marketplace? McKernan: If you build something today, if you build a house, your HVAC guy is not going to do your electrical. Your concrete guy is not going to do your plumbing. People want specialists today. In the Lori Chordas is a senior associate editor. She can be reached at lori.chordas@ambest.com. “As we think about insurance, you’ve got to have people to the earlier conversation that are experts. People expect expertise. The specialist can gain that expertise and you can scale it, because you don’t have to do it all at one time. You can do it one line at a time, one risk at a time.” Troy Korsgaden Korsgaden International35BEST’S REVIEW • NOVEMBER 2022 market today, consumers want a specialist. Whether you’re selling automobile insurance, they want to speak to somebody that’s a specialist in that area. We have a pet insurance business and our customers are talking to people who know pets from the DNA all the way down. What the consumer wants, as well as what the agent wants, is to speak to somebody who consistently writes and understands these accounts. What do brokers and MGAs need to do to identify a niche and move toward specialization? How do they find their specialty or the risk they want to focus on? Korsgaden: That CPA, doctor, or lawyer, whoever you’re dealing with, the professional has expertise partners, because they can’t be all things. They can’t know all things, but they are the gateway to all things, in terms of financial services. As we think about insurance, you’ve got to have people to the earlier conversation that are experts. People expect expertise. The specialist can gain that expertise and you can scale it, because you don’t have to do it all at one time. You can do it one line at a time, one risk at a time. While creating those programs, how challenging has it been to find talent specialized in your niche areas? Augustyn: It’s extremely difficult to find talent. Our industry’s at full employment. Many of our most experienced team members are reaching retirement age. It’s not a problem specifically to us. It’s an industrywide problem. It gets harder to solve when you’re niche-focused. We’re running a current search today. Our national talent pool is less than 10 people. That is very different than if you’re more of a generalist. You have to figure out ways to solve those problems. It becomes a full company commitment. It’s talent acquisition. McKernan: What we’ve done over the years, the last 15 years—we’ve had a very robust intern program. That has done us very well. We’ve put students into risk management, finance, marketing and all different parts of our business. Our retention on those interns has been very hot. We give them the experiences. We give them a career path where they can excel. That point has been very beneficial to us. Korsgaden: Insurance is a lot more sexy than it was when I got into it. I got in in 1983 and I like to kid—my company that I started with gave me a big old book of business called the phone book. But I bought the vision. A lot of us go out today in the industry and try to hire people and we don’t sell them on what a great industry this is. After you make the transition from generalist to specialist and you find your niche, how do you know it’s working and how do you measure success? McKernan: The measure of success is, No. 1, are you providing profitable premium to your carrier? Why is that important? If you don’t provide profitable premium to your carrier, you’re not going to be in business. The carriers are partners. Those who provide the capacity are partners. Then, on top of that, what are we looking at? Is the distribution diverse? The number of units. A lot of people just count premium but you must have a number of units growing. How are you growing your business? Are you going to diversify? Are you growing by the number of units, the number of accounts you’re riding on? How does changing one’s organizational structure to become a specialist help strengthen and build customer relations, while also achieving economies of scale and sales growth? Korsgaden: The real arms race in the industry today is to be the gateway to all things insurance and financial services. You lead with your expertise. The people say, “This is my firm. I want to have Richard Augustyn NIP GroupSpecialty Coverage 36BEST’S REVIEW • NOVEMBER 2022 everything in one place if possible. I’m going to them before I go anywhere else. They’re the first thing I think about for service and advice.” Risks are always changing. Is focusing on niche areas challenging in the face of an ever- growing and ever-changing risk landscape? Are there opportunities to come from that? Augustyn: It’s challenging because risks are being driven by technology changing. Technology is reshaping whole industries that we insure. That creates new and emerging risks. It creates new opportunities to gain expertise in. Those risks have to be managed, priced and transferred. Ultimately, it creates opportunities for those that are willing to spend the time and effort to specialize and become an expert in a particular niche area. McKernan: If you go back—think about 20 years ago when we all talked about employment practices liability, EPL, for example. When we all were all about the same age and we thought—what is this? Now it’s commonplace. Let’s fast-forward. You had to get expertise into that. You had to understand, what is that? Employment discrimination, sexual harassment, all those things. You fast-forward and what are you insuring? The biggest coverage today is—you better be offering your clients cybersecurity. Korsgaden: I experienced the cyber myself. I’m a consultant to insurance carriers. They all have a clause in the contract about cyber. They’ve got a real risk. It’s not a risk for the policyholders, but for the representatives to represent them and so on and so forth. What are the challenges or hurdles in becoming a specialist? What words of advice do you have for brokers and others who may be resistant to making that change? Korsgaden: If you think about the expertise partners that you’re going to have, it’s hard to convince somebody not to go back to the generalist system. Everybody wants to put on more people, but they want somebody to answer the phone when it’s ringing. They want somebody to get back to somebody. What have you found to be some of the biggest lessons learned when becoming a specialist, and what are some mistakes that one should avoid when making that transition? McKernan: One of the biggest things is, good leaders make good programs. They develop good programs. Finding that person who understands the whole valuation of a program, do they understand the underwriting? Do they understand the distribution? Can they go out and hire people who are the next level? That’s very, very important. The mistakes we’ve learned is, hey, going into industries that will never produce an underwriting profit. One of our first programs, it was a great program for us, but the carrier had a hard time making money. That was very hard. We ended up giving the pen back after 10 years. Augustyn: We’re in a market-based business and for whatever structural reason, there’s too many carriers who want to chase a particular market segment or too many brokers who want to chase a particular type of client. That probably is not going to make a good area to specialize in for the long term, whether you’re on the distribution side or you’re trying to underwrite for a profit for a risk-bearing partner. Looking at it, you must thoroughly due diligence these factors and ask yourself, are the market dynamics right? Is the market large enough that you can create a good revenue opportunity for your firm, but not so large where it’s attractive to a lot of big players? BR AM Best TV Visit www.bestreview.com to watch the full lineup of programs in Succeeding in the New Age of Specialty Coverage. Geof McKernan NSM Insurance Group37BEST’S REVIEW • NOVEMBER 2022 Prospecting for the Next Great Risk Opportunity Underwriters need to think about how they invest time and capital in launching new products and searching for new opportunities. by Tom Davis I nsurers are working hard to move beyond the economic challenges of recent years—and they’re finding opportunities in emerging risks. As they’ve been dealing with the continuing challenges of COVID-19 and the growing threat of cyberattacks, they’re prospecting for ideas and opportunities that can be brought to market. Hank Watkins, regional director and president, Lloyd’s Americas; Matthew Power, president, One80 Intermediaries; and Heidi Strommen, senior vice president, Distinguished Programs, took part in an AM Best panel entitled “Prospecting for the Next Great Risk Opportunity.” Following is an edited transcript of their discussion. People in the industry are making a living on developing new ideas. Who are they? Strommen: I would argue that it’s everyone. We all need to be involved in developing new ideas in order to meet the needs of our clients and to add value. By all of us, I do mean everyone in the insurance supply chain starting with retail brokers who often are closest to the policyholder, right up through insurance carriers and reinsurers. It’s a diverse group of individuals, diverse in terms of knowledge, skill sets, areas of expertise. That’s what’s needed to effectively engage in the process of identifying emerging risks. My own career experience is primarily as a program administrator in the hospitality space. Watkins: I’d also add that as we get further along this chain of more and more challenging events that face the world, governments will have to become more involved with the private sector to better understand what our needs are, and be more efficient in how they deploy capital to meet them. I also want to add that risk managers of the top companies in the world are very important “We all need to be involved in developing new ideas in order to meet the needs of our clients and to add value. By all of us, I do mean everyone in the insurance supply chain ... right up through insurance carriers.” Heidi Strommen Distinguished Programs Tom Davis is managing editor. He can be reached at tom.davis@ ambest.com.Next >