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.
–The net single premiums under the Cash Value Accumulation Test will also decrease, resulting in less cash accumulation per $1,000 of death benefit.
–Seven-pay net premiums used in Modified Endowment Contract Testing will similarly decrease.
–If a substandard table is the basis for guarantees, existing law may not allow such table to be used in calculating 7702 and 7702A values.
Now, lets look at the potential impact of the proposed CSO on the “extended maturity benefit” features that are so integral to todays policies.
As you know, EMBs were developed in response to increased longevity, a trend that poses problems for traditional whole life policies that endow at age 100. If insureds live to that age, these policies pay out the maturity value. But since doing so is a taxable event, it undermines a major tax advantage of owning life insurancethe tax-free transfer of death benefits to beneficiaries.
To solve the tax problem, companies have introduced EMBs either through riders or policy provisions. The EMB allows the policy to continue in force, with cash value still earning interest even though the cash value equals the face amount at age 100 and will exceed the face amount thereafter. Proceeds do not have to be paid until the actual date of death.
Now, assume the Proposed 2001 CSO Table is adopted and becomes the Table used for new nonforfeiture calculations that go out to age 120. Then, no special terms and conditions need to take effect at age 100. The age 100 cash value will be less than the face amount and extended maturity would not be needed until age 120. In effect, that would eliminate the issue for those currently concerned about it.
(Of greater concern are a variety of EMBs offered in conjunction with UL policies. Under the most popular version, the full death benefit continues in force past the maturity date, provided the cash value is positive [$1 per M] at maturity. An American Academy of Actuaries Extended Maturity Option Work Group has grappled with proper reserve and nonforfeiture values for this benefit before and after age 99. With the new CSO Table, provisions for EMB options at age 100 would no longer be needed.)
As you can see, adoption of an up-to-date CSO Table could impact life insurance policies in many areas. Many of the possible changes could pave the way for lower rates and/or changes in product features, depending on how companies respond.
As a producer, you will be able to go to your clients with some very good newsthe news that the insurance industry is following the longevity trends closely and making proactive changes to its contracts that should benefit customers in significant ways.
This will put the life insurance industryand youin a very good light.
Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies Inc., Bloomfield, Conn. 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.