Editor's Column
Changing Times for Life
New Research Provides Evidence of the Benefits of Screening Provided by Plans

by Kate Kinkade

Whether or when the economy recovers from the trauma of last year, the life insurance industry will continue to experience serious change for months, if not years to come. A confluence of events has created a state of affairs that is influencing products, compensation, and delivery of individual life insurance products.

Life insurance companies experienced the same financial upheavals as the rest of the financial industry in 2008 and 2009, with resulting pressure on capital and earnings. This came with two other industry-changing events: the need to re-price their most popular products due to reserving rules and the sharp decline in IOLI and related sales due to the financial markets and carriers' restraint. The pressure on earnings due to the financial markets, combined with the challenge to field a competitive product, has resulted in a reduced commitment to distribution for the short term. For many carriers, it makes more sense to invest in designing new attractive and profitable products than to continue to invest in distributing or financially supporting their current product line.

The Bottom line? Real change.

Carriers decided to stop placing insurance on those intending to sell policies to a third party, but they may not have been prepared for the significant decrease in new premium that resulted. In large part, this has been the cause of the reduction or "flattening" in U.S. individual life insurance sales, which started even before the financial crisis hit.

On the other hand, universal life carriers did not make a conscious decision to re-price their no-lapse products. They were forced into it by reserving regulation. The regulation was put in place due to pressure from whole life carriers that were struggling to compete amidst competitive guaranteed pricing, which had gained so much popularity. Carriers have known about the reserving rules for some time, but most didn't re-price their no-lapse universal products when they might have or should have; no carrier wanted to be the first to have a non-competitive product on the market. Low interest rates on reserves pressured the most reluctant carriers to increase pricing on these products, so new higher-priced products have been coming out fast and furiously.
At the same time, carriers are looking for new product designs that will attract the buyer. Individual life insurance was increasingly commoditized by low-cost guarantees. Carriers are back in the business of designing products to fit market needs: They’re searching for the next popular product – more importantly, the next popular profitable product. Most carriers can't afford to buy market share with unprofitable products anymore. They can't rely on making up the difference with investment earnings and they can't reduce capital to support products.

We can expect any number of product enhancements and new riders this year as well as new products on old chassis.

Several carriers are focusing on their current assumption products while others are finding ways to get consumers comfortable with variable. Whole life products have been resurfacing for a while. The price increases on no-lapse products are being coupled with various product designs to allow flexibility and thereby reduce cost.

As carriers with significant market share come out with new products and pricing, others will watch the results carefully to help determine their next steps. Carriers will move through this dance until the market has determined what it wants and then carriers will focus in on the designs and will improve or price to gain share. The product landscape will be different a year or more from now.
All of this will change how life insurance is sold. For years, replacements have made up a large percentage of permanent life insurance sales. It was an easy sale to replace an old whole life or current assumption universal life with a low priced no-lapse policy with lifetime coverage. It wasn't even a sale, more of an order. Just as, it isn't much of a sale to convince a senior to get "free" life insurance for a few years as the first step in a third-party purchase of the policy. If these avenues are not as open, life insurance agents will find other sales concepts and motivations connected to the benefits of the new products. Agents who haven't had to learn how to find their client’s needs and how to fit solutions to those needs will have trouble surviving this transition.

Carriers are considering distribution costs in their re-pricing as well. Many have cut back on their own distribution force (their wholesalers, etc). But, the real issue is whether they encroach on agent and general agent commissions to maintain competitiveness. The problem in this approach is obvious; competitive compensation will have just as great an impact on market share as competitive pricing just when the product becomes harder to sell (or more accurately, simply needs to be sold rather than just delivered) and there are fewer agents to sell it.

So the compensation will be part of the dance as well. Carriers may try to be more competitive in product pricing and less competitive on compensation while others will focus on product innovation and support the sales force.

This means that agents will be spending time over the next year learning new products, comparing products, and considering new carrier partners. The other approach is to keep selling the least expensive no-lapse products as long as we can. It’s not a bad strategy, depending on which are the last carriers that don't seem to be responding to the financial reality of earnings, capital, and reserves.

The more inappropriately priced guarantees the carrier holds, the more pressure there is on their capital and reserves. Large carriers, with a broad range of financial products, can offset this pressure more easily than those that have grown in only the past few decades and are dependent on life and annuity business for profitability. So, while it's nice to have our old familiar low priced product still available, it makes sense to be wary of the manufacturer. Nothing is easy.

The last evolution in the life industry came at a similar confluence of events: the insolvency of several of the country's largest life insurance companies, the end of the agency system as the primary means of distribution, and the development of universal life. Those events took place over the course of 10 years. The events causing the current change have happened over three years. Hopefully, this means that the new look of the industry will emerge in the next year or two and we will figure out, as we always do, how to be successful in the new environment.