COVID-19 Has Exposed the Fragility of the US Life-Insurance Industry

In the United States, they have done this in part by selling variable annuities, which package mutual funds with minimum-return guarantees over long time periods. Many people have bought annuities with the knowledge that they would pay out an agreed-upon minimum amount of money in retirement and potentially more than that, benefiting from the market’s upside potential. Over time, variable annuities have become the largest category of life-insurer liabilities, larger than traditional annuities or life insurance. In 2015, they accounted for $1.5 trillion, or 35 percent, of US life-insurers’ liabilities. 

But these products carry risk for the industry. From the insurers’ perspective, minimum-return guarantees are difficult to price and hedge because traded options, which they would use to manage risk, have a shorter maturity. This becomes particularly problematic when unexpected movements in the stock market, or in interest rates, cause liabilities to grow. 

The 2008–09 financial crisis exposed weaknesses in the sector. In the crisis, many insurers including Aegon, Allianz, AXA, Delaware Life, The Hartford, John Hancock, and Voya suffered large increases in variable-annuity liabilities, ranging from 27 percent to 125 percent of total equity. The Hartford was bailed out by the Troubled Asset Relief Program in June 2009 because of significant losses on its variable-annuity business.

The COVID-19 crisis illustrates that life insurers remain fragile, Koijen and Yogo write. The coronavirus death toll is not necessarily the cause of the companies’ troubles, because when policyholders die earlier than expected, life insurers lose on life-insurance contracts but actually profit from annuities. This suggests that the issue is the insurance products with minimum-return guarantees. For insurers&endash;who are making the payouts amid near-zero interest rates, widening credit spreads, and increased volatility&endash;that is likely to remain a challenge to the balance sheet for the foreseeable future.