The Federal Insurance Office has issued its annual report on the U.S. insurance industry. The report contains a financial overview of the industry through 2014; discusses consumer protection and access to insurance; and reviews U.S. regulatory and international developments.
In the first section, the report states that the U.S. insurance industry “continued to report consecutive years of good financial performance and, in the aggregate, remained in sound financial condition.” It finds that the insurance industry “remained active” in the U.S. capital markets and that, in the aggregate, it raised $8 billion in new equity capital in 2014. Debt financing “remained attractive as interest rates remained historically low,” the report observes. It also states that merger and acquisition (“M&A”) activity declined in 2014 in terms of the number of transactions that were announced but that the aggregate value of those deals – $14 billion – marked a 79 percent increase over the 2013 level. The report adds that, by the middle of 2015, “M&A activity increased significantly, with announcements of five major deals, with an aggregate value of nearly $132 billion.” It also says:
Several of these transactions were in the health insurance sector, and might signal competitive changes in market share.
Finally, the report highlights the growing role of alternative risk-transfer capital in the insurance industry, declaring that although this remains a “small share” of the total capital committed to reinsurance underwriting, its growth continues to put “downward pressure on reinsurance premiums.”
With respect to consumer protection and access to insurance, the report observes that the Dodd-Frank Act authorized the FIO to monitor access to affordable insurance “for traditionally underserved communities, minorities, and low- and moderate-income individuals.” It points out that although gender remains “a common factor in insurance risk classification,” some regulatory authorities have prohibited the use of gender as a rating factor in certain contexts. It also notes that “[t]ransgender advocates have raised concerns because insurance applications do not indicate whether an answer to a question about sex should be based on the individual's gender identity or his/her gender marker on legal documents,” and it recommends that states “consider whether and in what manner sex remains appropriate for risk classification in insurance products.”
It also recommends that states “continue to assess whether marital status is an appropriate underwriting or rating consideration due to the potential effect on the cost of insurance for widowed and divorced individuals.”
The report highlights the “importance of natural catastrophe insurance for individuals” and discusses the limited availability of such insurance in some geographic areas with correlated exposures to events such as flooding and earthquakes. It also discusses:
the evolving issue of whether an earthquake is solely a natural phenomenon or may also be a man-made phenomenon. If fracking or the use of waste water disposal wells is deemed to be the cause of an earthquake, policyholders may be denied coverage for resulting losses because many policies exclude losses resulting from events which are not naturally occurring.
The report says that the FIO “will continue to monitor the developments concerning earthquakes, the impact on consumers and the industry, regulatory reaction, and the overall market for earthquake insurance.”
In the context of consumer protection, the report next considers retirement security in the United States and the role of life insurers “as an important provider of guaranteed retirement income, primarily through annuity products.” It states that Treasury and the U.S. Department of Labor “continue to work on a joint initiative to encourage access to, and use of, products designed to provide a lifetime stream of income during retirement” and it observes that “federal authorities have proposed various measures to better educate and inform consumers about retirement savings products, and to protect consumers against inappropriate sales practices.”
The report has a great deal to say about annuity transactions and suitability standards for sales of annuities, noting that there is an “absence of national standards” and that, as a result, “federal involvement may be appropriate.”
With respect to U.S. regulatory developments, the report points out that MetLife, Inc., American International Group, Inc. (“AIG”), General Electric Capital Corporation (“GECC”), and Prudential Financial, Inc., have been designated as systemically important financial institutions under Dodd-Frank.
The report also addresses state-based capital developments involving risk-based capital (“RBC”) and principles-based reserving (“PBR”) as well as captive reinsurance. It also addresses terrorism risk insurance, cyber security, and cyber risk insurance. Finally, in this section, the report also describes how the current system of establishing workers' compensation benefits results in “uneven compensation to injured workers from different states” who suffer the same permanent injury.
In the international developments section, the report covers international standard-setting developments of increasing importance to U.S. insurers, among other subjects.