Imagine an industry where customers hand over sums of money each year, but potentially don’t ask for anything in exchange for decades. Sounds like a scam, yet this is how the life insurance sector works.
These regular premiums known as the insurance float, married with what is often a steady industry, are what makes life insurance companies one of the more compelling timeless investment options.
Not convinced then look at some of the most well-known millionaires it has produced. Shelby Davis, for example, started investing in 1947 when he was 37 and amassed a fortune of $900m. This was through a lifetime of investing exclusively in insurance stocks adopting the ‘buy and hold’ strategy still favoured by many today.
Investors have long been drawn to the attractive yields on offer from the sector and according to business advisory firm Deloitte, profits from life insurance companies are estimated to grow by £1.5bn from £6.6bn in 2016 to £8.1bn by 2025.
Types of life insurance policy
There are three major types of life insurance: term, universal and whole life insurance.
Term insurance is the most popular kind of cover and this pays out a lump sum or a monthly income if the policyholder dies within a set period of time. If they don’t die during the term, the policy doesn't pay out and the premiums paid are not returned.
Whole life assurance offers protection for an insured’s lifetime until death occurs, and therefore premiums are much higher.
Universal life insurance is a policy that combines features of term life and whole life insurance by adding a cash component. Instead of just selecting a specific term and putting 100% towards the policy, there is a cash value account that may be invested.
What affects the sector’s share prices?
Earnings are directly tied in with insurance risk and both have a big impact on share prices in this sector.
Yet, it is interest rates that provide the largest blow to a company’s stock. When they are low, companies find it is harder to produce products that are attractive to both shareholders and customers.
New entrants into the market are also affecting life insurers’ profits by offering simpler and more engaging ways to save for retirement.
Richard Baddon, head of insurance insight and partner at Deloitte, said: “The challenge for life insurers will be to provide customers with low-cost advice, guidance and financial education.
"For example, robo-advice, or automated advice models, can generate low-cost, yet well researched personal product recommendations for a saver with typical needs.”
Moody's life insurance outlook
The growing pressures on profits from low interest rates, coupled with shifts in their regulatory and business environments, led Moody's Investors Service late last year to change the outlook of the US life insurance industry from stable to negative.
The outlook reflects business conditions over the next 12 to 18 months and in the UK, the outlook was changed to stable from negative. This was largely due to the expectation of a moderate and manageable impact from Brexit.
UK life insurers are less vulnerable to low rates than some of their European counterparts because the majority of their reserves are unit-linked with no interest guarantees.
The report said: “UK life insurers' business model has allowed them to maintain resilient performance in the face of increased competition and positions them strongly for the long-term shifts in the sector.”
What can make one company buck the trend?
Moody’s say it will be technology that will increasingly differentiate the life insurance industry winners from losers. There is widespread pressure for companies to offer better digital services to help them connect more efficiently with customers.