Category Archives: Life Insurance

Life Insurers Must Adapt

Life Insurance providers are today operating in an environment that’s rapidly changing with time and is highly challenging as well.

Owing to these challenges and fast paced changes over a short time frame, insurance businesses are under tremendous pressure from many external factors. In order to understand more about the various factors that influence the ratings of insurance business, as well as to understand some of the strategies that should be adopted by insurance business CEOs, we have put in place a survey of analysts who work with some of the leading insurance equities around the world. If these strategies are adopted, they would help insurance business improve their business value. The most surprising outcome of the results from the survey is the fact that analysts have sky high expectations from the life insurance industry’s best performers. In 2012, as compared to other years, financial analysts have begun to demand convincing growth in revenue from insurance products and they expect to see this growth on an annual basis.

Financial analysts have also started demanding a 9% increase as compared to 2011, in pre-tax returns on financial investment and equity. However, as insurance providers still continue to struggle and battle with the economic crisis which has affected the industry worldwide, for these businesses simply surviving and maintaining their current positions in the industry might sound like a very reasonable expectation in itself. This is because weak demands for insurance products and new requirements with regulation make it difficult for insurance providers to grow. However financial analysts continue to expect growth in revenue as well as growth in return on equity.

The survey also included questions around the impact that the tough market conditions had on the insurance businesses and the industry.

Responses to these questions provide an insight into the financial analysts’ thinking. More than 55% of the analysts expected the tough market conditions to still have a positive impact on the insurance providers leading the forefront in the insurance industry. Analysts also anticipated that the weaker businesses, which were unable to mold themselves and adapt to the challenges in the environment, will lose out on their share. They expected such businesses to either be acquired by the larger established businesses which were more stable despite the rocky economy or that they would be completely eliminated. However, their responses indicated that the top leaders would be automatically forced to enhance and strength their capabilities. They also expected that the top leaders would also be able to demonstrate added capacity for growth.

Research and studies on the state of insurance business within the economy show that organic growth might be considered more important as compared to inorganic growth. Financial analysts expect life insurance providers to focus their efforts more on the emerging markets as compared to mature markets. 44% of the analysts mentioned that it was critical that insurance providers focus their efforts on organic markets. Only 25% of the analysts felt that insurance providers should be concentrating on mature markets. However, 20% of the analysts also predicted acquisitions and mergers within the emerging markets. They believed that mergers would thus help contribute to the overall growth of the businesses. They do believe that organic growth will face some challenges over the next three years. However, analysts believe that insurance providers should try to better comprehend and forecast customer behaviors and requirements in order to be able to combat these challenges.

More than 35% of analysts say that understanding and predicting customer behavior would be a very key factor in being able to grow.
Other critical factors would include the capability of development and to be able to implement mulch-channel strategies for distribution. Analysts also believe that introducing new and relevant products to the customers would be a good opportunity for growth and expansion. This would also give them the opportunity to be able to break into new business markets. By focusing on mulch-channel expansion, they would also be able to better control their risk. They would also have more potential and liberty to enhance their asset management skills and capability. Analysts do understand that for life insurance providers, to be able to achieve the equity goal would not be an easy task, because the insurance industry is facing a much stronger push back than it has ever experienced before.

Demand in mature markets continues to be volatile and low. Customers do not have confidence in investments that are equity based and interest rates continue to be low. However, there are areas of opportunity for growth and expansion.

American Taxpayer Relief | Estate Taxes

On Jan 2 of 2012, when President Obama signed into law the American Taxpayer Relief Act in an attempt to avert and clear the fiscal cliff, there were a good number of rumblings that were heard and felt throughout the life insurance industry.

These rumblings lamented the provisions related to estate tax that had been established as part of the new Act. With the signing of the Act, individual exemption was set at five million dollars for estate taxes. As per the Act, top tax rate was also increased to 40%. If the deal had not been set in place and the Act had not been signed, then estate tax rate would have exponentially increased from 35% in 2012 to 55% eventually. The exemption for estate taxes could only have been a maximum of one million dollars. If that had happened, LIMRA notes that 12.5% or more of the households within the United States would potentially have felt estate tax liabilities weigh heavily on them. The average tax due for such households would also have been $1.4 million dollars. This could have led to many of them entering the market for life insurance coverage and policies for estate planning related reasons.

While it is true that the opportunity to reap the benefits of the low hanging fruit didn’t really materialize, we believe that the new provisions related to estate tax are good for the economy of the country. In essence, the laws in places helped improve the economic health of the nation. We also strongly believe that the sequence of events will not negatively impact the life insurance industry in any way. We do understand that an exemption of a million dollars would not have introduced many more individuals to the market to purchase life insurance with the purpose of protecting their estates. But we do also believe that the residual damage and fallout would have ended up creating a much bigger problem for the nation. If so, it would have taken the nation much longer to recover from a deep, long economic crisis. However, the most important point to remember is the relative permanence which is a part of this entire process.

Ever since the Bush tax cuts were enacted in 2001, policies related to estate tax have been in flux. This volatility called for much higher exemption levels.

It also led to lowering of tax rates which were phased out to the population over a time period of ten years. In 2010, estate tax was completely eliminated. In the recent years, this uncertainty ended up creating repetitive headaches for advisers as well as their customers who were impacted by the uncertainty. In such a situation, the new tax cut which was signed into effect by President Obama can be compared to aspirin for the headache. Instead of trying to figure out where the tax rate and exemption levels would finally end up at, whether estate tax would go through more adjustments on an annual basis, whether or not estate tax and gift tax would get unified, the new act now gives advisers more surety and confidence to be able to plan and act with much more certainty.
Advisers can now contact clients proactively and offer them a clear sense of direction.

What this means for rich and well to do customers is that, they can look forward to regular financial reviews with their financial advisers and real estate planners. In the traditional sense, the five step approach helps to determine how, whom and where to transfer your estate to in the event of your death. It means that customers can now arrange the transfer in such a way that those objectives are met. Transfers can also be managed at the lease possible cost. The final step in the process is to arrange to have the expenses met while paying the lowest fee possible. In most cases, this would mean paying with life insurance money.

So while the signing of the new Act simplifies rest estate planning needs for most households, other opportunities also crop up with the possibility of bright features. Any agreements related to business succession planning will continue to grow and expand through the next few years. Small businesses will also successfully transition more in the upcoming twenty years as compared to any other time period in history. Analysts forecast that the insurance market dealing with life settlements might see a bump, because a lot of older Americans, having prepared for worst case scenarios might be over insured. However, this scenario has now been averted.