While we avoid making predictions for the future, some changes are highly anticipated. With these notes, we look to help our clients navigate the upcoming short-term and long-term changes effectively.
AI and the longevity problem
Extending human lifespan, as a challenge, is a great fit for the large-language-model type AI. Life Science researchers have been accumulating, over more than 2 decades, a vast plethora of high-quality genetic information that is both text-based and tokenized. It would be hard to argue against the fortuitousness of this match between language AI and genomic research, and the inevitability of the outcomes expected from this match – landmark innovations in biomedical technology that can extend human life span.
Why is this relevant for life insurers?
Well, longevity risk hasn’t been much of a concern among annuity companies (insurers) since the rate of annuitization had always been quite low (<5%) in deferred annuities. Retirees’ perception of their ability to fund their longer lifespans may change quickly. Many insurers which sell only annuities do not prefer to carry life insurance because it is asset-light. Now would be a good time for them to look into adding life insurance business as a natural hedge against emerging longevity risks in their annuity portfolios.
Lower inflation without a recession (aka soft landing)?
Leading economists such as Larry Summers have warned against cutting down interest rates (stopping medication) before fully and completely rooting out inflation (infection). At the current 3% inflation and sub 4% GDP growth, the economy seems to be in a very good spot, suggesting a combination of productivity gains and resilience in domestic consumption, and that soft landing might really be here. Although the catch here is that FED may still wait to see confirmed signs of a downturn (mild recession) before fully committing to normalizing down the rates.
Lower Rates
While the CME FedWatch suggests a 1% cut in rates before the end of 2024, we think that the pace of rate cuts will be far slower. We have two main reasons to think so:
a) Banks do like high rates, even if they dislike the pain that comes during the rate hikes. Weak banks and sub-prime credit do not like high rates, but those are small and contained. If an economy can keep growing while servicing a high interest rate, then surely that economy has high productivity. Banks would very much like that scenario to persist. Higher for longer rates can increase tax-payers’ burden, but that is tax-payers’ problem (not FED’s problem).
b) The Federal Reserve does not want to seen as reducing rates too soon in case inflation creeps back up again. Lower energy prices have been the primary reason behind lower inflation lately, but energy prices can revert back up quickly if any of the many ongoing geopolitical conflicts escalate. Also, to us, it seems that the Fed under chairman Powell has relied on the S&P 500 index as a key indicator of the health of US Economy. And so, as long as the S&P 500 index remains high, (we think) Fed will not be too eager to cut rates.
Equity MYGAs are a darling
Well, Equity MYGAs have always been great. Policyholders love equity-linked interest guaranteed for multiple years. And their love is pouring in. With MYGAs, the insurer is taking an extra ounce of interest rate risk (that asset gets called in and gets reinvested at lower rates), but that can be hedged easily.
More annuities needed, please!
The demand for annuities is way up, and it has all the structural supports of demographics, positive outlook for equities, and positive policyholder experience.
RILAs continue to gain market share
RILAs continue to draw market share from variable annuities, primarily attracting younger (ages 30 to 50) and wealthier buyers. RILA sales will likely exceed $50B in 2024. For younger buyers, the advantages of RILA are unequivocal – tax shelter and a long-term commitment to the investment. Insurers must advertise to younger buyers from these two angles.