A report co-authored by Brattle economists finds that the life insurance industry is a critical driver of economic growth that helps provide stability for the U.S. economy while delivering financial protection to millions of American families, including those most vulnerable to falling below the poverty line.
“Life insurers are vital to an efficiently functioning modern economy and society, and a key contributor to enabling robust long-term economic growth,” writes Dr. J. David Cummins, the Joseph E. Boettner Chair of Risk Management and Insurance at Temple University’s Fox School of Business. “Life insurers invest predominantly in long-term, stable, fixed-income investments to match their long-term obligations to the insureds.”
The study, “The Social and Economic Contributions of the Life Insurance Industry,” explains the industry’s roles, and uses industry data and academic research to highlight the industry’s contributions to the U.S. economy and society from three perspectives: to individuals, to the economy, and to the government. The study was sponsored by MetLife and co-authored by Dr. Cummins, Brattle Principals Drs. Michael Cragg and Bin Zhou, and Senior Associate Jehan deFonseka.
A Shield against Financial Loss for Individuals
According to the report, 60 percent of American households are covered by some form of life insurance, with an average policy coverage amount of nearly three times the annual household income. The total amount of financial protection provided by the life insurance industry in 2014 was $20.1 trillion – an amount equal to 116 percent of the U.S. economy.
The study cites research showing that the purchase of life insurance has a positive impact on an individual’s living standards. For example, following the death of primary earners, life insurance reduces the percentage of households experiencing severe financial deterioration from 33 percent (without life insurance) to just six percent (with life insurance).
On retirement security, the report highlights research showing that the private annuity market increases household net worth. Without private annuities, individuals have no way to hedge the risk of outliving their retirement savings except by consuming less and investing more in risky investments. For instance, a household headed by a 65-year-old in good health experiences a 16 percent increase in financial and housing wealth due to an investment in annuities, according to the research.
A Stabilizing Component of the U.S. Economy
The life insurance industry also provides a stable source of funding for the credit markets, with private companies in all sectors of the economy relying on this funding channel. Fully 93 percent of the corporate bonds held by life insurers have a maturity greater than five years, and more than two-thirds have a maturity greater than 10 years.
This long-term focus has an added benefit – it makes life insurers an important source of financial stability during periods of broader market turmoil. Commercial banks and broker-dealers that rely on short-term wholesale funding are susceptible to liquidity crises. With life insurers, stable funding from policyholders greatly reduces the need for liquidity during financial panics. The paper quotes Therese Vaughan, former president of the National Association of Insurance Commissioners, who said in 2012, “Life insurers can manage through [financial crisis] volatility and look to the long term, and this difference provides an important source of stability for both individual consumers and financial markets.”
Life insurers are also an especially important source of capital for privately held companies, which tend to be smaller enterprises that find the public markets expensive to access. In 2014, life insurers held nearly $800 billion in private placement debt. Without the life insurance industry, “these investments could not be funded at all or as efficiently, thus driving up the average cost of capital and causing reduced investment,” the authors write.
Government and Taxpayer Benefits
The life insurance industry also provides a benefit to the government and taxpayers by alleviating pressure on social spending. From 2010 to 2014, the life insurance industry distributed $774 billion in contract payments, including life insurance benefits, income payments from annuities, and disability income payment.
Using data from the American Council of Life Insurers, the study also highlights the economic impacts of the life insurance industry in all 50 states. These impacts include benefits paid, total in-force coverage, number of policies, average coverage amount, total investments, and direct jobs supported. In 2014, the life insurance industry paid over $500 billion in benefits to Americans, invested in over $5 trillion investments, and employed more than 870,000 people across the U.S.
“Life insurance is an important component of the U.S. economy,” notes Dr. Bin Zhou. “It plays a unique role not only in the safety and security it provides to individuals, but in the stability and liquidity it provides to the financial markets and the overall economy. Furthermore, the life insurance industry significantly alleviates the financial burden caused by mortality, longevity, and morbidity risks for individual households and the U.S. government.”
The whitepaper can be downloaded below.