Nested Interest

Over the past few months, several marquee life insurance companies have announced their retreat from product lines that are important to the planning needs of current and future retirees:

• Sun Life, Genworth and now Hartford Financial exited the variable annuity market – a product that provides retirees an opportunity to participate in market growth with guaranteed protection against market losses
• MetLife and Prudential exited the long term care insurance market

These decisions have been made despite the wave of boomers that stand ready to buy such products, which on the surface would appear to be a great business opportunity for insurers.

However, the reality is that life insurance companies have been feeling the pain from an extended low interest rate environment, elevated market volatility (which increases their cost to hedge the market risk they assume from products life variable annuities), and increasing healthcare costs.  While still financially strong, they appear to be retrenching for some rough waters that lie ahead.

These strategic decisions were not taken lightly.  This is not a switch you can turn on and off.  These institutions have made substantial investments in these businesses, and it will be costly to re-start them in the unlikely event that they decide to do so.

This should be a concern to everyone approaching retirement, not only because of the more limited availability of insurance products, but because the economic factors that have lead to these bold decisions will affect all retirees. The “raw cost” of the “materials” that insurance companies use to build their products has gone up, so there really is no where else for consumers to turn to protect themselves and finance these needs.  This is like restaurants closing because of increasing food costs – not only will there be fewer restaurants, the cost of eating at home will be going up, too.

If insurance companies have concluded that they can no longer assume and manage these risks responsibly, how can retirees go it alone?

Insurance companies are perhaps the most financially secure sector within the financial services industry.  It takes a long, sustained, and significant trend to pierce the hulls of these organizations – they are designed to ride through choppy waters without disrupting their course or disturbing its cargo.

If they are heading back to harbor, its time for all of us to take warning.