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July 19, 2001 at 08:00 PM
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Current insurance company reserves are based on the 1980 Commissioners Ordinary Mortality Table.
Over the past 20 years there has been certain tinkering with the Table–such as for 20-year select factors used in calculating Triple-X reserves. But today, work is well underway to update the Table. In fact, the replacement, currently labeled Proposed 2001 CSO Table, is already circulating in the National Association of Insurance Commissioners.
This raises a key question for life producers who track product features and performance issues: If the Table is adopted, will it usher in major changes for the products you sell? The answer is yes, many potentially significant consequences could result.
For instance, Triple-X reserves under the proposed Table could be considerably lower than under current CSO tables. Companies would then be able to lower premiums on term policies, possibly reduce the use of reinsurance, or increase profit margins.
The American Academy of Actuaries has estimated the impact on different ages and product type. While reserves for a particular product depend upon its particular design characteristics, the Academys findings suggest that reserves on a per $1,000 basis can fall significantly. On a 20-year term plan, for example, reserves were estimated to fall by 33% for a “Model Office” block of business (essentially, a portfolio).
Meanwhile, gross premium levels on traditional whole life contracts may drop significantly.
Minimum cash values will be affected, too. In the past, when a new valuation table was introduced, it was also incorporated into the Standard Nonforfeiture Law. Actual minimum cash values depend upon the expense allowance formula adopted. Nonetheless, using the Proposed 2001 CSO Table with an age 120 cut-off would certainly lower the minimum cash values at the higher ages.
Lower cash values will lead to lower gross premiums for traditional life policies.
What about mortality margins, or the difference between guaranteed and current mortality charges in a universal life contract? These may be constrained by use of the proposed Table, particularly in the case of smokers. As a result, its possible that use of per $1,000 charges may increase. (Such charges are already common in survivorship policies, where early cost of insurance charges are so low that the insurer needs other sources of policy revenue.)
Heres another effect: When based upon the 2001 CSO, simplified- and guaranteed-issue premiums or charges may need to be higher than guaranteed levels. Up to now, they have frequently been limited to guaranteed levels. This shift may present some filing challenges, as several states have not approved premiums or charges based upon substandard tables.
Then, too, calculations under Sections 7702 and 7702A will be impacted, and in general the proposed Table will adversely affect the ability of policies to be used as accumulation vehicles. Here are the salient points in this area:
–Guideline premium limits will be lower. Consequently, the allowable level of premium funding (under the Guideline Premium Test) will be lower for a given amount of insurance.
