Rising interest rates generate prospect of disintermediation risk – report

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Rising interest rates generate prospect of disintermediation risk – report | Insurance Business America















Value of surrendered annuity policies see an 18% increase in Q3 2023


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A new report from AM Best has stated that rising interest rates in the life insurance segment have generated the prospect of disintermediation risk.

The “Annuity Surrenders Up Through 3Q23, Beating Premium Growth” report found that the value of surrendered annuity policies has seen an increase of 18% in the third quarter of 2023, in comparison to the data seen at the same time in 2022.

“Runoff annuity insurance companies or those that focus on block acquisitions rather than organic growth and can’t replace the business being surrendered are most likely to experience a shrinking asset base,” said Jason Hopper, associate director at AM Best.

“It’s possible that maturing bonds may need to be used to cover additional surrenders instead of being reinvested,” he added.

The report found that in the fourth quarter of 2022, surrender benefits have topped $100 billion, which was also seen in the second quarter of 2023. Meanwhile, the surrenders in the second and third quarters of 2022 were some of the lowest numbers seen in four years, which was partly attributed to the reinsurance transaction by Fortitude Re, an insurance company worth $4 billion.

Surrender values paid as a percentage of premium were at the lowest levels seen since 2019. This reflected a strong premium growth which was seen to have held steady at 17% through the third quarter of 2023 as individual annuity premiums saw the 11th consecutive quarter of year-over-year growth.

“The life/annuity industry is less concerned about surrenders once policies leave the surrender charge period, as assets purchased to back the liability are typically matched to the surrender charge period, and insurers will typically drop the crediting rate on policies once that period has expired,” said Hopper.

“However, insurers want to retain customers and have them reinvest in new, current product offerings, which starts the surrender charge period over again. This helps transfer capital from fully liquid liabilities to new, potentially longer-duration policies,” he explained further.

In contrast to medium and smaller-sized firms, the ratio of premiums to surrender benefits was steadier for larger annuity writers in the last four years. However, if surrenders increase without premium growth doing the same, they have less of a cushion to fall on.

The report further noted that the annuity market will continue to be highly competitive in an environment where the interest rate continues to be at a high level for a longer period of time. This is because of many new companies entering, which include new insurers backed by private equities and asset management, as they added to the capacity of the market and strong sales of multi-year guaranteed annuities.

AM Best is a global credit rating agency, news publisher, and data analytics provider that specializes in the insurance industry.

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