Life insurance is getting even more complicated. Consumers have had to navigate through choices like term, whole life, or cash value policies, how much insurance to buy, optional riders, surrender policies, etc. Generally, a trusted insurance agent would shop around for the best benefit at the most reasonable cost. Because guarantees are contingent on the financial strength and claims-paying ability of the issuing company, based on ratings, large insurance companies would usually hold the policies.
Insurance companies, in turn, profit from premium payments and by investing those premiums, primarily in fixed-income securities like bonds. With our historically low interest rate environment since 2008, insurers have been feeling the pinch with under-performing assets.
Most recently we’ve seen a trend in major insurers selling off blocks of life insurance and annuity contracts to private-equity firms, asset managers, hedge funds, and other investment institutions. According to the latest data from rating firm A.M. Best, more than two dozen investment firms own or control one-eighth of the U.S. insurers. Furthermore, A.M. Best reported that insurers owned or sponsored by these investment institutions hold substantially more private-placed debt—a source of funding not regulated by the Securities and Exchange Commission—asset-backed securities. Instead, they are backed by income-generating assets such as credit card receivables, home equity loans, student loans, and auto loans, and more below-investment-grade debt than the traditional insurance industry.
Many policyholders are being notified of the change in their policy while being assured that the contract remains in insurance divisions that are regulated by state insurance departments; however, the reality is that some of the new owners have limited insurance expertise and perhaps a greater appetite for risk when it comes to investments. Some state insurance departments have required backstop trust accounts to bolster capital for newcomers buying blocks of policies.
Investors should have an insurance agent review their existing policies. It could be that they may no longer have the insurance company they initially purchased. By itself, that’s no reason to switch, but you need to know who will be paying a future death benefit. A trusted agent can also provide further information from rating agencies about the acquiring company’s financials and keep you informed of new product innovations. At a minimum, you should work with your financial adviser to confirm that the policy you have in place is the best option for you today and in the future.
As for new policies, some of the new players are not issuing new products. Still there is concern that these acquiring institutions will hike up premium rates and fees because they don’t have to worry about future business. Furthermore, rating agencies still identify more than 300 insurance companies that are not selling off their contracts. Mutual insurance companies, which are owned by its policyholders, have not jumped on this trend.
Overall, the insurance industry is undergoing a fundamental shift, and it is too soon to know if this will benefit consumers.