Editor's note: This article has been amended to clarify which of two Dodd-Frank mandated reports FIO released today.
When it was created by the Dodd-Frank financial reform law, the Federal Insurance Office was mandated to "submit a report on or before September 30 of each calendar year to the President and to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on the insurance industry and any other information as deemed relevant by the Director or requested by such Committees." Today, nearly two years after the first deadline (Sept. 30, 2011), the first of these reports has been released (Warning: Link goes to PDF).
It should be noted that this report differs from one required by a mandate to "conduct a study and submit a report to Congress on how to modernize and improve the system of insurance regulation" by January 2012. That report's release date also has been pushed back several times, and we've had some fun with it. That report is still in process.
The PDF of the insurance industry report is 53 pages long, and we'll be poring over it to elucidate what exactly might impact the insurance technology industry. First, straight from its Executive Summary (if you could call four pages a "summary"), here are four "current issues and emerging trends" the FIO has outlined:
1. Low interest rate environment. The office clearly sees this as the key issue affecting insurers systemically: its summary is as long as the other three combined. It particularly impacts the life insurance sector, the report says:
Life insurers offering annuities with guaranteed benefits, in particular, may encounter stress in the event of a protracted low interest rate environment. The effects of low interest rates may be exacerbated by increased longevity risk for products offering lifetime income. In addition to adversely affecting investment returns, the current low interest rate environment affects the present value of insurer contract obligations – particularly for life insurance products.
That stress can impact tech strategy as well: Colombian Financial Group recently told I&T that revaluing of policies associated with a low interest rate environment held up its policy admin consolidation.
2. Natural catastrophes. The major impact on the insurance market is potential pricing-out of certain markets, the FIO says: "Natural catastrophes can have a significant, even devastating, impact on individuals, families, businesses, and communities. In many high risk areas, the high cost of insuring against catastrophic loss limits access to affordable coverage." Insurers have grappled with how these affect risk management and selection strategies, as well as marketing and outreach, following Hurricane Sandy.
3. Changing demographics. "The aging of the U.S. population, combined with increased life expectancy, has increased demand for products that offer lifetime income protection," the report notes. Insurance consultancy Conning pointed out how not just age, but other demographic factors like ethnicity and socioeconomic status affect life insurance sales in a report earlier this year.
4. Overseas growth opportunities. With much of the U.S. insurance market tapped out, American companies are looking to other regions for growth. The FIO notes that while from 2000-2007, three-quarters of all premium growth was in North America and Western Europe, since then the majority of it has shifted to Asia and Latin America. OneShield's Kim Morton wrote about the challenges insurers face in attempting global growth for I&T earlier this year.