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Well, better late than never I guess. Sunday is the new Thursday anyway…right?
It would seem that once again it pays quite well to be in the life insurance industry. Earnings for the industry have been steadily climbing upward for the last two years.
The Numbers
Now, for those of you who are not yet convinced that life insurance is this super-stable, awesome income generating entity…we have some numbers to share with you that may change your mind. In 2011, statutory earning were $15,5 billion. Well, the numbers are in for 2013…44.4 billion.
That's wee bit of growth don't you think.
For an industry that is managed so conservatively, hockey stick growth curves indicate an unbelievable demand for life insurance products. If you can't tell, we are impressed.
The 2011 surplus (money that life insurers have but they don't need right now) $333.5 billion, that number in 2013 $370 billion. That's money the industry is sitting on. In effect, a really large “rainy day” fund.
New Sales
For the past couple of years the trend line for new policy count has been basically flat. That's interesting considering that growth in earning. So, that begs the question–why are earnings going up despite a relatively flat line on new policy growth?
Well, it has to do with the mechanics of a life insurance policy and the costs associated with issuing them. Life insurance becomes much more profitable over the long-term much like their policyholders do. There a great deal of cost involved in issuing a new policy but as time passes there are much less costs for the insurance company which causes earnings to rise.
The life insurance industry is incredibly stable and looking at a company over the short term will not create a fair picture of its profitability. In fact, most times we see company beginning to ramp its production of new policies/premium, there will be dip in profitability.
Just like any other business, the life insurance industry has a cost associated with acquiring new business. In this case, it may cost them more to obtain a new policy than the premium the take in. But there is a silver lining…
Most of that premium stays on the books in year 2 and most of the cost has gone away. Profitability follows that path of keeping premium on the books and keeping the costs associated with premium low.
