In the 20th century, America saw a vast shift from collective self-sacrifice to individual self-reliance, from pluralism to separatism.
This vast shift is a challenge for the insurance industry. We see it in its productsin the new do-it-yourself vehicles in variable and mutual fund products, for instance.
The companies, even if part of conglomerates, have become separatists also. Case in point: Mortality experience differs sharply from one company to another, as you can see in the accompanying chart. This reflects differences among socio-economic markets served (lower, middle, and upper, as the chart shows). No doubt stringency of underwriting plays a key role, too.
I am bringing all this up because it has bearing on an important change that I would like to see in the life product domain. This change has to do with the Commissioners Standard Ordinary Tables.
My argument is that the industry may now need to be allowed to take a “separatist position,” if you will, with regard to whether it deviates downward from the CSO Tables or not. Let me tell you why I think this way.
As you know, the CSO Tables are compulsory mortality tables required by the states for the calculation of company reserve liabilities and cash values in life insurance. With the advent in recent decades of universal life and variable universal life, these tables have also been used to set maximum “cost of insurance rates” used within those products.
The CSO Tables have historically followed the dictates of our pluralist past. They have been set with high enough mortality margins to encompass the experience of practically all life companies. Because of these built-in margins in the Tables, regulators have never had to worry much about the actual experience of companies.
But today, we need to ask: Are life products suffering because those margins are too high? Is the business in a new ballgame because its growth and increased sophistication enable it to take greater responsibility in terms of setting mortality levels? In the interests of the insurance-buying public, should companies that exhibit experience that is significantly and consistently better than average be allowed to adjust CSO Tables downward, according to definite regulations that would be established?
I think so. Here is why.
Some changes involving the CSO Tables are already underway. For instance, adjustments are being allowed for term insurance (under the so-called Triple-X regulations.) Also, something of the sort is permitted under the “Illustrations” regulation.
Furthermore, there is some movement toward using guaranteed maximum COI rates (for UL, VUL, and term products) that are lower than those permitted by the CSO Tables.
(As an aside to technical readers: CSO Tables impact federal income tax and “insurance company definitional” questions. The matter of permitted variations would have to be carefully studied and satisfactory solutions arrived at.)
Now, lets bring it all together. In my opinion, due to the differences in companies, markets, and mortality that have emerged over the past several decades, I believe the industry needs to be permitted to use variances from the CSO Tables. But such permitted differences must be based upon airtight rules.
For instance, a company seeking a downward adjustment should be required to take into account relevant emerging experience. (The latter italics, which are this authors, are from the present Triple-X regulation.)
This must be done in a rigorous way, for that builds credibility. This is essential to safeguard the solvency of insurers and to warrant the trust that consumers place in those same insurers.
Regulatory requirements would need to be constructed. As a starter: A certified mortality study of the relevant experience could be required, going back not more than five years and containing at least 1,000 actual deaths.
Make no mistake about it. The CSO Tables are a key bulwark of financial soundness in the life insurance business. They should be maintained, for they have stood the test of time.
However, if a company can credibly demonstrate why it should be allowed to diverge from those Tables, according to universally established rules, they should be allowed to implement such differences. This will maintain the soundness of the business, improve the products and ultimately better serve the public.
John M. Bragg, FSA, ACAS, MAAA, is actuarial consultant at John M. Bragg and Associates, Atlanta; past president of Society of Actuaries; and past CEO of Life Insurance Company of Georgia.You can e-mail him at firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.