Broad financial industry deregulation under the Trump administration would ease regulatory burdens for large U.S. insurance companies while macroeconomic trends resulting from shifting global and economic policies could have a significant impact on profitability, premium growth and investment performance, according to Fitch Ratings.
In a recent analysis, Fitch said it does not expect the recent election results to have any immediate rating implications for the broader U.S. insurance industry. Insurance remains primarily a state regulated industry with most activities falling outside the scope of the Federal government. Also, policy initiatives directly focused on the non-health insurance industry will not likely be a priority in the early part of President-elect Donald Trump’s term, Fitch analysts said.
Financial deregulation however, which was promoted by the president-elect during his election campaign and is likely to be supported by the renewed Republican Congress, could have multiple implications for insurers.
The potential repeal or amendment of the Dodd-Frank Act is a case in point. The designation of systemically important bank and non-bank financial institutions (SIFIs) falls under the Financial Stability Oversight Council (FSOC). SIFIs in the U.S. face higher regulatory standards and three insurers — Prudential, AIG and MetLife — were designated as such in 2014. Fitch analysts believe a Trump administration could promote a pullback on insurance SIFI designations following changes in FSOC leadership or through changes to the Dodd-Frank act itself.
MetLife won a court ruling in March that rescinded its SIFI designation and the Trump administration may choose not to follow through on an appeal, Fitch said.
The Federal Insurance Office, which was also created under Dodd-Frank, may be changed as well. According to Fitch, the FIO’s role could be reduced or modified under a more U.S.-focused approach promised by Trump that could reduce U.S. participation in international insurance regulatory activities.
How a Trump administration balances consumer protectionism with deregulation could also have implications for insurers, according to the rating agency. Recently-approved Department of Labor (DOL) rules that create a best interest fiduciary standard for investment advice provided for retirement accounts and annuities could also be reviewed. At the least, Fitch believes a delay in implementation from the current April 2017 target is likely.
Tax code changes too could affect the insurance sector. Some life insurance products benefit from tax sheltering, so a simplification or changes to tax rules could have implications for the relative value of these products. Some insurers also shift business off-shore to take advantage of lower tax regimes; this strategy could lose appeal could if the corporate tax rate is lowered. Trump administration policy and tax changes may incentivize insurers to keep business onshore, Fitch said.
Beyond potential regulatory and tax shifts, insurers will remain exposed to macroeconomic changes, both through their investment portfolios and owing to the connection between economic growth and premium growth. Future trends in interest rates and inflation in particular could have a significant impact, especially if the recent spike in Treasury yields marks the beginning of a longer term trend.
Fitch said that a scenario involving a steady increase in interest rates linked to higher growth and limited inflation would be credit positive for insurers, especially life insurers. But, Fitch analysts added, given the lack of specificity in Trump economic policies at this time and the related uncertainty, a scenario involving sharp spikes in rates or inflation would be disruptive for profitability and growth across all insurance sectors.
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