The Other Happening to Life Insurance
by Kate Kinkade

In the midst of a struggling economy healthcare reform, and carriers working their way back to financial health, another big change is looming, which has been almost lost in the maelstrom. Premiums are about to increase on the most popular life insurance product to be sold in decades – no lapse universal life.

This is no surprise since carriers have been warning of the increase since new reserve rules went into force several years ago, but they have only now started to take action. The issue is, of course, which goes first. Until recently no carrier wanted to be first in line. Due, in part, to recent economic events, price increases are no longer optional.  Some carriers have simply stopped selling universal life with secondary guarantees at certain ages rather than introducing an obviously uncompetitive product. Others are coming out with new rates before year end; still others are holding on until early 2010.

Required reserves are determined based on mortality tables and assumed returns. Guaranteed benefits naturally require higher reserves. Secondary guarantees in universal life products were developed using the same reserve calculations used for current assumption universal life products until whole life carriers protested and the NAIC issued new requirements, necessitating carriers to increase reserves on their secondary guarantees. Most carriers increased rates very little, if at all, in reaction to the need to increase reserves.

Carriers claimed their pricing was profitable, even with higher reserves. One assumes, however, that no carrier wanted to be the first to increase pricing and lose market share, so until recently, they were supporting pricing of the product. Supporting pricing simply means that, while they had to increase reserves, they accepted the resulting decrease in surplus and earnings rather than increase pricing and lose market share.

Along comes a drop in stock values, mortgage and real estate values, increase in reserves for variable annuity guarantees, and reduced earnings. Carriers’ tolerance for pricing support is being sorely tested.

Most who understand the structure of insurance financials know that most carriers haven’t come close to a solvency threat throughout the economic crisis. Carriers generally continue to have very high surpluses, which is the difference between their assets and liabilities. Their greatest liability is their reserves, so after setting aside assets adequate to meet all claims, carriers continue to have significant surplus. While this is still the case, the combination of recent events has had a significant impact on surplus for many carriers.

Asset values decreased; primarily equities and mortgages (The industry. as a whole, had under 5% in sub-prime mortgages). Reduced asset values reduce surplus, even though the assets are actually are still there. However, variable annuity guarantees required many carriers to increase their reserves, which means they had to move money into more conservative investments to meet reserve requirements. They had to sell assets they might have held and take actual losses rather than only declared losses.

Now the cushion carriers relied on to support pricing of secondary guarantees has been absorbed by the reduction in asset values, increased reserves for variable annuities, and resulting reduction in surplus. Eighteen months ago large carriers were not concerned about some reduction in surplus to support pricing, but with current consumer and rating company concerns about carrier stability they can’t afford it. They need to increase pricing even if it means lower sales.

Bottom line – The cost of secondary guarantees is going up by a lot. The first carriers out with new pricing are simply giving up the market while others catch up. Carriers are being careful not to suggest a fire sale, but guaranteed products will never be this inexpensive again. Now is the time to insure our parents; a really good deal is about to go away.

People will still pay for guarantees; the internal rate of return on guaranteed life insurance will still be the best guaranteed investment most buyers can make. Other products will also step in – variable life with secondary guarantees, and new current assumption products. The internal rate of return on these products will still be the best fixed interest or variable investment most buyers can make.

What is more, most buyers won’t know they are getting a more expensive product than they could have gotten had they bought in October of 2009. Unless we are extraordinarily poor salespeople, they will still see the great leverage of our product.

I believe carriers are making the change now because they have to, but are relieved to be doing so when 1) the insurance market is slow and the best time to give up market share and 2) there are enough distractions  currently  that there will be less negative impact on agent relationships than there would be otherwise. Good carriers are far less concerned with losing short term market share than they are with losing long term producers. Carriers know that, once agents get used to a company, they tend to keep selling their products. The last thing the responsible carrier wants is for producers to get used to the carrier selling the lowest priced product because that company hasn’t adjusted pricing for reserves.

There is a change in the life insurance market coming. Guaranteed products will be priced more appropriately; other products will be back in play. Successful agents will adapt quickly. Carrier loyalty will be tested. And we should all insure our parents Now.