Best’s Review – January 2017

The new president’s policies are a potentially potent elixir for insurers.

Donald Trump’s inauguration this month represents the end of an intense period of speculation and sophistry about his administration’s policies and the beginning of their implementation. Trump’s impact on the structure and operation of government will be profound, chiefly because his administration will benefit from majorities in both houses of Congress, and only secondarily because Trump is the ideological antipode of his predecessor. His impact on the economy, on the other hand, could be even more impactful—music to the ears of the growth- and yield starved insurance industry.

For insurers and their policyholders, changes large and small are in store. There’s no question the Affordable Care Act (ACA)—first on the long list of Obama-era legislation Republicans have queued up for annihilation—will be ceremonially extirpated in the opening hours of the new administration. And yet, Trump has already made multiple concessions to reality: Republicans suffer from pre-existing conditions just like Democrats and have trouble affording health care. And they’ve come to like the option of keeping their kids on parental plans until the age of 26. The bottom line is that the campaign promise to “repeal and replace” Obamacare will be implemented as something more akin to a reform and restructuring effort rather than a complete repudiation of President Obama’s signature legislative achievement. Popular elements of the ACA will be retained, while the much-loathed individual mandate to purchase coverage will almost certainly be eliminated. Private health insurers are likely to gain more underwriting freedom as coverage mandates are jettisoned, which should help arrest and reverse the adverse selection death spiral that has led many insurers to abandon the ACA exchanges. Competition in terms of price and product should increase, moving the American health care system away from the single-payer model in which it was headed.

The early messaging on Obamacare is encouraging because it suggests Trump’s vision for “making America great again” involves a pragmatic approach toward vexing problems. Overregulation is one of those problems, and insurers are hoping for relief from bank-centric regulation through a partial rollback or reform of Dodd-Frank. Easing of the Department of Labor’s fiduciary rule could benefit life insurers. The urgency with which a Trump administration will tend to insurance industry concerns, apart from the ACA, is unclear. Trump is said to reward loyalty, and when it comes to prioritizing, administration insiders may notice that insurers donated nearly five times as much to Hillary Clinton’s campaign as they did to his own.

After a momentous election such as this, the industry’s political pundits can be forgiven for focusing too much on the regulatory trees and not seeing the economic forest. The reality is that the greatest gift Trump and his compliant Congress are likely to bestow on the industry is the potent combination of faster economic growth and higher interest rates. A mere one percentage point improvement in GDP growth could add $5 billion to $6 billion in premiums per year to the top line of growth-starved property/ casualty insurers. The expectation for faster growth is pushing up yields. Higher interest rates could arrest the slide in P/C insurer investment income, which remains nearly 20% below pre-crisis levels. Insurers were as surprised as any industry by Trump’s victory. The potent combination of a lighter regulatory burden, faster economic growth and higher interest rates could be just what the industry needs to jolt it from its growth and ROE doldrums.
Best’s Review columnist Robert P. Hartwig, Ph.D., CPCU, is past
president of the Insurance Information Institute and current professor
of risk management, insurance and finance as well as co-director of
the Center for Risk and Uncertainty Management at the University of
South Carolina’s Darla Moore School of Business. He can be reached


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