FORECAST 2023: Business Climate

January 2023

Insurance and financial services companies faced a tough business climate last year, and it looks like they are in for more of the same in 2023. Rising interest rates and inflation are of particular concern.

Inflation has been hammering consumers for well over a year. There are signs it’s slowing down — including a 0.5 percent drop from September to October 2022. Nevertheless, many economists do not expect a significant change in the near future. At a November 30, 2022 press conference, Jerome Powell, chair of the U.S. Federal Reserve, noted many of the factors propping up inflation are easing. He said, while a recession may be necessary, a soft landing still is possible. At the same time, some economists believe we currently are in a recession that will not go away any time soon.

At the press conference, Powell said the federal funds interest rate is likely to reach 5 percent or more this year. The current rate range is 3.75 to 4 percent.

Geopolitical tensions also are affecting the economy. The COVID-19 pandemic and the Russia-Ukraine war profoundly reorganized global structures and relationships last year, and they will continue to drive additional uncertainty in the year ahead, according to A World Rebalancing, a November 2022 S&P Global Market Intelligence report.. Also driving uncertainty and instability are government sanctions and protectionism, energy and supply chain disruptions, labor shortages, and recessionary worries. Adding to the uncertainty are various cryptocurrency meltdowns and contentious mid-term elections in the United States.

Uncertainty spooks markets, corporations, and consumers — the markets, in particular.

The stock market got off to a rocky start in 2022, as investors tried to assess the long-term effects of the pandemic on the global economy. It was downhill from there. In June, for example, the MSCI ACWI index, which tracks stocks from both emerging and developed markets, fell 21 percent from a November 2021 high. In the United States, the S&P 500 index peaked at 4,796 on its January 3 close; by June 16, it had fallen 23.55 percent to 3,666.

How do these factors affect insurance and financial services companies?

For starters, rising interest rates — especially coupled with inflation — are bad news for their consumers, forcing them to make tough choices about their spending. After the necessities, it may be difficult to afford life insurance or to fund an annuity or retirement savings plan. It doesn’t help matters when consumers, at the same time, are watching the value of their existing investments take a nosedive.

“Inflation is forcing hard choices for families,” says Mike James, EVP, Head of Life & Wealth, NFP, “which will increase the household insurance gap in America. It’s a harsh reality, but people must make decisions on where to spend their money, which doesn’t go as far as it used to, and buying insurance often loses to household expenses. This makes it even more critical that we proactively articulate the value our solutions provide.”

On the other hand, rising interest rates are “beneficial to life insurers given the amount of revenue earned from investments,” says Joe Monk, SVP, Financial Services, State Farm. “This can be used to improve overall financials and increase the competitiveness of products, especially those with an investment component.”

“Generally,” says Jonathan Bennett, Head of Group Benefits, The Hartford, “rising interest rates and inflation are tailwinds to the group benefits market in both top-line growth and disability loss trends. Employers’ reactions to these trends can include potential reductions in their own workforce, which can drive higher unemployment and create a headwind. Inflation without offsetting wage growth can create a reduction in employee-elected coverages.”

“From a carrier perspective,” says Jasmine Jirele, Chief Executive Officer, Allianz Life of North America, “compared to just a year ago when short-term [interest] rates were headed toward zero, the higher rate environment is welcome. It provides an even greater value proposition to consumers seeking income guarantees, especially those that have an increasing income component to combat elevated inflation.”

While rising interest rates can be good for insurers, one survey participant cautions, “Rising rates will help life insurance and annuity carriers until they cause a deep recession.”

Inflation puts pressure on corporate expenses and prices. And, notes Neil Sprackling, President, US Life & Health, SwissRe America Holding, “Let’s not forget the potential impact on persistency. We have not seen economic conditions like these for well over a decade, so our concern about lapse rates has been somewhat muted. We need to pay careful attention to persistency through 2023. It has a major impact on product profitability.”

Continued volatility in the markets may dampen merger and acquisition activity in the industry, as well as dampen customer demand for equity-based insurance products, says one executive. On the other hand, says another, this volatility compels consumers to search for protection, which may increase interest in annuities, pensions, and other insurance products that deliver fixed future income.

Will the markets settle down? Can governments tame inflation? Will geopolitical tensions cool off? We will see as the year unfolds.