3 Little-Discussed Threats to Life Insurers

Colin Devine, a longtime life insurance consultant and analyst, has some ideas about possible threats to life insurers that may surprise plenty of other industry veterans.

Devine talked about the demons in the wings today in New York, at the eighth annual Life Settlement Institutional Investor Conference.

The Life Insurance Settlement Association (LISA) organizes the conferences to help representatives from life settlement firms network with representatives from banks, pension funds, private equity funds, hedge funds and other entities with a taste for alternative assets.

Devine, who is now a senior advisory partner at Grail LLC, told attendees that he thinks the future of the life settlement industry is bright, but that players in that sector should understand the risks they face when they buy life insurance policies.

Compared with how the life insurance industry looked two years ago, "I don't think it's any better," Devine said. "I don't think it's any worse…. The chickens have come home to roost."

Devine mentioned long-term care insurance obligations and the U.S. Department of Labor 's fiduciary rule.

Even though the Consumer Financial Protection Bureau is not supposed to have oversight over insurance, whether it does or does not is not absolutely clear, and no one in the life insurance industry should be eager to come face to face with Sen. Elizabeth Warren, D-Mass, at a Senate hearing, Devine said.

"That never goes well for anybody," Devine said.

Devine also covered some lower-profile risks to life insurers. Here are three.

Statement of Financial Accounting Standards Number 60

FAS 60 governs how insurers account for long-duration insurance contracts. It lets them lock in assumptions about future policy benefits at policy inception, unless a premium deficiency exists. If a premium deficiency exists, the insurer is supposed to recognize the deficiency with a charge to income, along with other adjustments.

If insurers get to the point that they have to acknowledge that, because of low interest rates, they suffer from premium deficiencies, that could suddenly make lines that look good today, such as whole life, look much worse, Devine said.

Many life insurers have high levels of risk-based capital, but focusing on RBC ratios may overstate a life insurer's health, because a RBC ratio is a measure of capital quality and adequacy, and the main risk the typical life insurer faces today is insurance obligation risk, Devine said.

2. Low lapse rates

Issuers of stand-alone long-term care insurance often note that policyholders cling tightly to their LTCI coverage, and that low lapse rates have contributed to the products' poor performance, Devine said.

Variable annuities with guarantees and universal life policies with secondary guarantees also have lapse rates that are much lower than originally expected, and the low lapse rates for those products are hurting the performance of those products, too, Devine said.

3. Block sales

Both publicly traded financial services companies and policyholder-owned mutuals face pressure to get out, but the only blocks of business with much appeal to buyers right now are blocks of group insurance business, Devine said.

Today, the typical buyer for other types of life and annuity business is a private equity firm, Devine said.

"How is the buyer going to treat that policy block?" Devine asked.

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