March 12, 2012

Universal Life Insurance Premiums May Rise Under NAIC Approach

Premium levels on certain universal life with secondary guarantee and term universal life products may be rising. An approach adopted by the National Association of Insurance Commissioners’ joint working group would require insurance companies to adjust asset reserve levels associated with these universal life insurance products, and any increases in the requisite reserves would likely result in a corresponding rise in premium levels.  Increased premium levels may make these life insurance products much less appealing to your clients.

At issue is the methodology used by insurance companies for applying Actuarial Guideline 38 (AG 38) to these products. When looser guidelines are adopted, reserve levels may be lower than those actually required. The approach designed by the NAIC is widely supported by insurance companies for the certainty it can provide in determining reserve levels, despite the potential increase in premium levels. 

A Bifurcated Approach

The NAIC’s initial framework adopts a bifurcated approach, so that policies written before a certain date would be evaluated differently than those policies written after that date. So-called “old business” policies would be evaluated on a stand-alone basis using asset adequacy analysis that would incorporate “moderately adverse scenarios.” If the policy reserves are determined to be adequate based on this evaluation, no adjustment to the reserve levels would be required. However, it is likely that some adjustments will be required.

Prospective business policies–those written after the effective date of Principle Based Reserving–would be evaluated according to PBR methodologies designed to take into account those modern financial products that have been developed recently, or that may be developed in the future. PBR is meant to represent a less formulaic approach to determining required reserve levels and, as such, is supported by many insurance companies. PBR would also provide more detailed guidance on the application of methods for calculating reserves associated with newly developed life insurance products so that insurance companies can more accurately determine required reserve levels. 

Because PBR is not yet effective, and is not expected to be implemented until 2015, there is time for insurance providers to develop methods for increasing reserve levels where necessary. 

Leveling the Playing Field

The controversy concerning the issue of reserve level requirements came about due to the belief by some companies that their competitors were underwriting these universal life products using actuarial guidelines that are looser than those required. A universal approach to determining reserve levels would create a measure of equality among these companies to ensure they are on the same playing field. It was claimed that some companies were using higher premiums to produce reserves, which often resulted in under-reserving for universal life products. 

The initial framework will be sent to the Life Insurance and Annuities Committee and the Financial Condition committees for further review next month.

Conclusion

While the new approach to applying AG 38 to certain life insurance products may cause an increase in premiums, it may make evaluating these products significantly easier. The new methodologies would clarify what is required of life insurance companies that sell these products, and would apply a universal standard that could make comparisons between products much more relevant. Even so, it is unlikely that many clients will welcome the increases in premiums that could accompany this benefit.

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