Broad financial industry deregulation under the Trump administration would ease regulatory burdens for large insurance companies while macroeconomic trends resulting from shifting global and economic policies could have a significant impact on profitability, premium growth, and investment performance, according to Fitch Ratings.
Fitch said in a statement that it did not expect the recent election results to have any immediate rating implications for the broader U.S. insurance industry. It noted that insurance remained primarily a state regulated industry with most activities falling outside the scope of the federal government. Also, Fitch added, policy initiatives directly focused on the non-health insurance industry will not likely be a priority in the early part of President-elect Trump's term. It added that financial deregulation, which was promoted by the president-elect during his election campaign and is likely to be supported by the renewed Republican Congress, could have multiple implications for insurers.
Fitch said that the potential repeal or amendment of the Dodd-Frank Act is a case in point. The designation of systemically important bank and non-bank financial institutions (“SIFIs”) falls under the Financial Stability Oversight Council (“FSOC”). SIFIs in the United States face higher regulatory standards and three insurers – Prudential, AIG, and MetLife – were designated as such in 2014.
Fitch believes that a Trump administration could promote a pullback on insurance SIFI designations via a less inclusive approach following changes in FSOC leadership or via changes to the Dodd-Frank act itself. It noted that MetLife won a court ruling in March that rescinded its SIFI designation and Fitch observed that the Trump administration may choose not to follow through on an appeal.
The Federal Insurance Office (“FIO”) – also created under Dodd-Frank – may be changed as well, Fitch pointed out. The FIO could have a reduced or modified role under broader policy initiatives to lessen financial regulatory burdens and to take a more U.S.-focused approach generally. The result could reduce the prioritization of participating in international insurance regulatory initiatives.
In Fitch's view, how a Trump administration balanced consumer protectionism with deregulation could have meaningful implications for insurers. Recently approved Department of Labor (“DOL”) rules that created a best interest fiduciary standard for investment advice provided for retirement accounts and annuities could also be reviewed. At the least, Fitch said, a delay in implementation from the current April 2017 target is likely. Fitch maintained that the DOL rules were ratings neutral for insurers, but reducing some provisions of the rules could limit increases in compliance costs that would result.
Tax code changes also could affect the insurance sector, according to Fitch. Some life insurance products benefit from tax sheltering, so a simplification or changes to tax rules could have implications for the relative value of these products. Some insurers also shift business off-shore to take advantage of lower tax regimes; this could be de-incentivized under a lower corporate tax rate. Trump administration policy changes may incentivize insurers to keep business onshore via a combination of greater scrutiny of such practices under a more protectionist orientation or incentives provided by tax changes designed to encourage repatriation, Fitch said.
Beyond potential regulatory and tax shifts, insurers will remain exposed to macroeconomic changes, both through their investment portfolios and owing to the connection between economic growth and premium growth, Fitch added. Future trends in interest rates and inflation in particular could have a significant impact, especially if the recent spike in treasury yields marked the beginning of a longer term trend. A scenario involving a steady increase in rates linked to higher growth and limited inflation would be credit positive for insurers, especially life insurers, in the view of Fitch. But given the lack of specificity in Trump economic policies at this point and the related uncertainty, a scenario involving sharp spikes in rates or inflation would be disruptive for profitability and growth across all insurance sectors, according to Fitch.
Learn more: www.fitchratings.com.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].