Will Life Insurance Credit Rating Downgrades Affect Costs?

life insurance credit downgrade

In early August, shortly after the credit rating agency Standard & Poor’s lowered the United States credit rating to AA+ for the first time in history, many businesses, including life insurance companies, were threatened with similar downgrades. Staying true to its warning, S&P did indeed downgrade five large insurers by mid-August. Now that the life insurer ratings have been downgraded, could consumers be affected?

Why Insurance Companies Were Downgraded

On August 5, the United States suffered a credit rating downgrade, marking the first time in history the nation’s economy was not a member of the AAA club.

The reason why Standard & Poor’s–the ratings agency that issued the downgrade–decided to lower the rating was because lawmakers skated dangerously close to a sovereign debt default after surpassing its $14.3 trillion debt ceiling on May 16. Instead of working quickly and diligently to strike a debt deal shortly after breaching the limit, lawmakers fought to come to an agreement until the day before actual default.

A default could have had a detrimental effect on the both the U.S. and world economies, possibly spiraling them into a recession. Decision-makers at S&P said lawmakers’ lollygagging made them uncertain that something similar wouldn’t happen again. As a result, they chose to downgrade the nation’s rating, which in turn resulted in life insurer downgrades.

The five life insurance companies that saw their ratings downgraded shortly after U.S. credit downgrade were New York Life, United Services Automobile Association, Teachers Insurance and Annuity Association of America, Northwestern Mutual and Knights of Columbus.

All of the companies have stated their belief that their ratings were dropped solely because of the nation’s downgrade since they are directly linked–life insurance companies currently own $5 trillion in stocks, bonds, mortgages, real estate and other investments within the United States.

Could Downgrades Negatively Impact Customers?

While there has been no official word on whether the downgrades of the companies could affect their customers negatively, insurers seem fairly confident that since the downgrades are tied to the U.S. rating drop, and not any wrongdoing on their parts, their businesses should be able to function as usual.

At the time insurers were warned their ratings could drop, Paul Berry, a spokesman for insurer USAA, told San Antonio Express-News “This has no impact on USAA’s business model, financial performance or ability to make good on its commitment to members.”

Other insurers expressed similar sentiments, assuming they would not be affected negatively whether they were downgraded or not.

Additionally, only S&P downgraded these companies. They have maintained their AAA statuses from the other agencies rating life insurance companies, including A.M. Best, Fitch Ratings and Moody’s Investors Service.

But this doesn’t mean it’s impossible for customers to be affected in the long run, especially if investors decide the matter is a major issue. This is because ratings are important marketing tools in the insurance industry and one of few ways consumers have any sense of the financial health of insurance companies.

If ratings drop too low, brokers might choose not to sell policies from affected companies–and if enough policies aren’t sold, existing policyholders could either see their rates go up to make up the difference or may be impacted by the company’s lack of beneficiary distributions.

The likelihood of company’s ratings dropping low enough for any of this to happen is slim, however. Even if the ratings did drop low enough, life insurance companies are likely to have enough money in reserves to ensure customers are not impacted severely under these circumstances.

This doesn’t mean customers can’t see what they might view as negative changes to their policies over time. But they probably won’t be related to life insurance company ratings and instead will be tied to other determining factors in the industry.