Life Insurers Get a Reprieve
The market recovery saved life insurance, but fundamentals remain unattractive.
As the debate surrounding the fate of banks shows, the financial services industry is heavily influenced by regulation, and life insurance is no exception. The history of the domestic life insurance industry has been framed by the regulatory environment and will continue to be for the foreseeable future. But while the regulatory framework plays a major role in the economics of the industry, it is by no means the only factor. Balance sheet investments and leverage, as well as changes in the mix of products that life insurers market to consumers in response to competitive factors, have also served to make life difficult for these firms, resulting in low profitability and vulnerability to macroeconomic swings. Ultimately, the industry's structure is not conducive to companies digging themselves economic moats, and we believe that the risk/reward ratio for investors is unfavorably skewed.
The present shape of the domestic life insurance industry was set on course by events from 1945. A Supreme Court decision led to the passage of the McCarran-Ferguson Act, which formalized the state-by-state insurance regulatory regime which exists to this day. Because the act forced insurers to gain licenses to operate in each individual state, it created artificial barriers to entry, which impeded the development of a nationwide insurance industry. At the time, there were fewer than 500 life insurance companies in the United States, but for the following 40 years the number climbed year after year until reaching a peak of almost 2,500 in 1988. Since then, the trend has reversed course, and the last 20 years has seen steady consolidation with fewer than 1,000 life insurers currently operating in the U.S.
Alan Rambaldini does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.