The 2023 Life, Health and Annuity Prediction Almanac
The year has changed, and forecasters are busy looking at sales data, stock market data, general economic data, tea leaves, Ouija boards and anything else that can give them hints about what comes next.
Here’s a catalog of some of the predictions that have flowed our way, sorted into 10 categories.
1. Accounting Rules
New Long Duration Targeted Improvement accounting rules are supposed to take effect in 2023 and change how insurers account for products, such as life insurance policies and long-term care insurance policies, that often stay in place for many years.
The new rules may hurt the stocks of insurers that are already having problems but do little to insurers with strong profit margins, Morgan Stanley securities analysts predicted in a Life Insurance Primer 2023 report released at the end of 2022 and posted behind a paywall.
2. Dealmaking
Block Deals
Many traditional reinsurers and reinsurance affiliates of private equity firms have used reinsurance arrangements or acquisitions to acquire blocks of in-force life insurance policies or annuity contracts from the original issuers.
Deal activity for blocks of in-force life and annuity business has remained strong, in spite of the effects of rising interest rates on the cost of borrowing money to make deals, according to PwC’s Insurance: U.S. Deals 2023 Outlook report.
“Acquirers of these in-force/legacy blocks don’t rely on debt financing, which makes these transactions appealing to buyers in a rising rate environment,” the PwC analysts said.
“As a result, we’ve seen increased demand and rising valuations for these assets as private equity seeks to deploy its extensive dry powder.”
Distribution Firm M&A
Demand for insurance distribution firms will remain strong, but rising interest rates will increase the cost of borrowing, PwC analysts said.
“As the cost of borrowing increases, we expect valuations to decline, specifically for insurance brokerage targets where many of the brokerage consolidators are private equity backed and rely heavily on debt financing to fund these acquisitions,” the analysts warned.
Life Insurance Company M&A Headwinds
Economic and geopolitical uncertainty cut the number of big U.S. insurance company mergers and acquisitions in the second half of 2022, PwC analysts observed.
“We expect economic headwinds to persist into the first quarter of 2023 as companies evaluate the impacts of inflation and interest rates on deal values,” the PwC analysts said.
Life Insurance Company M&A Tailwinds
Higher interest rates could make life and annuity issuers more attractive targets for mergers and acquisitions, by increasing the insurers’ projected profitability, according to the Deloitte Center for Financial Services’ 2023 Insurance Outlook report.
The firm predicted that life insurers will use 2023 life business sales to shift from being protection providers to fee-based asset gatherers, administrators and employee benefit sellers.
Private equity firms will continue to invest in life and annuity issuer deals, and life insurers may continue to try to improve their technology by acquiring insurance technology startups, Deloitte analysts predicted.
3. Demand Drivers
Consumer Confidence
About 34% of 3,656 U.S. consumers surveyed for Bankrate in November 2022 said they expected their personal financial situation to get somewhat better or significantly better in 2023, and 29% said they expected their financial situation to get worse, according to Bankrate.
Generation Z
The oldest members of Generation Z — or U.S. residents born from 1997 through about 2012 — are turning 26 this year. Many are already marrying, having children and shopping for life insurance, Melbourne O’Banion said in an email interview. O’Banion is the CEO of Bestow, a company that writes and sells life insurance online.
The new Generation Z life insurance buyers will insist on buying life insurance through their mobile phones, and they will start out wanting policies that cost $20 per month or less, O’Banion said.
Inflation
About 71% of U.S. adults surveyed in the fourth quarter of 2022 told Lincoln Financial that they gave inflation a rating of 4 or 5 on a 5-point concern scale, up from 64% in the first quarter of the year. The item that ranked second, “having income enough income in retirement,” received high concern ratings from 59% of the survey participants.
Inflation could do more damage to life insurance sales than to sales of property and casualty insurance, according to S&P Global Ratings. The increased cost of living could hurt life and annuity demand by reducing consumers’ purchasing power, but many P&C lines are mandatory, and P&C coverage issuers can easily increase premiums to adjust for inflation, S&P said.
4. Demand by Product Line
Annuities
Total U.S. annuity sales could increase to a range of $286 billion to $306 billion in 2023, according to LIMRA. The financial services research organization has estimated that U.S. individual annuity sales totaled about $267 billion to $288 billion in 2022.
For the period from 2021 through 2026, U.S. individual annuity sales could fall 5% per year for products without significant guarantees and increase an average of 6% to 7% per year for products with at least some guarantees, McKinsey analysts predicted.
Health Insurance
About 12% of freelancers and other “gig workers” were planning to go without health insurance in 2023, according to a survey of about 4,000 gig workers that was released in November 2022. The survey was organized by Stride Health, a web broker that serves gig workers.
Life Insurance
For the period from 2021 through 2026, U.S. individual life insurance sales could increase about 2% per year for fixed-rate life insurance policies aimed at buyers who want to focus on building cash value; about 3% to 4% per year for protection-oriented life insurance; and about 6% per year for life insurance policies with cash value totals tied to the performance of the investment markets, according to McKinsey analysts.
U.S. sales of individual term life insurance could improve in 2023, according to LIMRA. The financial services research organization predicted that sales of individual whole life and individual variable universal life will hold steady in 2023, and that demand for indexed universal life will experience a minor decline.
5. The Economic Backdrop
Credit Markets
What a weakening economy could do to bond issuers, and what problems at bond issuers could do to life insurers’ trillions of dollars of investments in bonds, may be questions of interest for investors in 2023, Morgan Stanley analysts proposed.
“For now, we are solving for an early 2000-style default cycle — shallow but at risk of being protracted,” the analysts said in a Life Insurance Primer 2023 report released at the end of 2022. “In 2023, we expect default rates to increase and push above historical averages. But it is early to expect a default spike.”
Big, publicly traded life insurers have strong capital levels, and that could reduce the effects of any increase in defaults that does occur, Morgan Stanley analysts suggested.
Gross Domestic Product
Real U.S. gross domestic product, or national income, could:
• Fall by as much as 2% in 2023 or increase by as much as 1.8%, according to the Congressional Budget Office.
• Increase by 0.1% in 2023, according to the Swiss Re Institute. The institute estimated that real U.S. GDP increased by 1.8% in 2022.
• Increase by 0.4% in 2023, according to Moody’s Investors Service economists. They estimate that real U.S. GDP increased by 1.8% in 2022.
• Increase by 0.5% in 2023, according to median Federal Reserve Board member and Federal Reserve Bank president predictions. Fed forecasters estimated that real GDP also increased by 0.5% in 2022.
