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The Federal Insurance Office’s 2018 report provides a detailed description of the U.S. Insurance market including industry statistics and the regulatory environment. Here is the outlook for the domestic insurance market:
Based on financial results reported by insurers through the first half of 2018, the outlook for the U.S. insurance industry appears to be a continuation of the healthy trends observed in 2017. The effects of ongoing monetary tightening and recent expansionary fiscal measures, however, may be more marked in 2018. Since 2015, the Federal Reserve has raised the fed funds rate on seven separate occasions, each by 25 basis points, with the most recent increase in June 2018. The fed funds rate currently stands at 2.0 percent, which is also the Federal Reserve’s target inflation rate. However, the interest rate hikes have yet to manifest themselves fully in the financial results of insurers. After a persistent decline in annual yields on invested assets since 2007, the L&H sector reported a slight uptick by two basis points in 2017 and a four basis point increase for the first six months of 2018 relative to the comparable period a year ago.
For the P&C sector, yields rose by more than 18 basis points during the first half of 2018 compared to the same period in 2017, suggesting an improvement may be in store for 2018 after the sector reported two consecutive years of flat yields.
Though U.S. employment has grown past full employment levels, with an unemployment rate of 3.9 percent as of August 31, 2018, and wages have exhibited some upward movement, there is little likelihood of a sudden spike in interest rates to negatively affect life insurers through increased surrenders by policyholders and unrealized losses in investment portfolios.
Both insurance sectors will likely experience increased relief to their profit margins in 2018, as interest rates are expected to rise at a moderate pace. In time, the reversal of a low interest rate environment will be beneficial for insurers. In addition to improved earnings, gradually rising interest rates will ease spread compression in spread-dependent businesses and enable insurers to more closely match their asset and liability cash flows to meet liquidity demands.
You can find the Annual Report on the Insurance Industry (here).
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