The 2001 Commissioners Standard Ordinary Mortality Table is ready and awaiting final adoption by National Association of Insurance Commissioners. Most states will likely adopt it effective Jan. 1, 2004, thus beginning what will be a four-year transition period.
This new mortality table will become the new minimum valuation standard for life insurance products. It reflects improvements in mortality since development more than 20 years ago of the 1980 CSO.
Though variation by risk, class, gender and age exists, these mortality improvements are expected to have an overall effect of reducing basic whole life insurance reserves by 15% to 20%.
Where variable life insurance is concerned, the story is more complicated. In this line, the 2001 CSO will impact many areas–mortality charges, surrender charges, maturity age, and guideline premiums.
The development is an important one to follow. With $5.9 billion of sales last year, representing roughly 40% of life insurance new premium, VL has become a key product line for many insurers and distributors.
(Note: This article will focus on the largest VL market segment, flexible premium variable universal life designed for the accumulation market. But other product forms also exist, including survivorship VL and single premium VL.)
Many of todays VULs use a “reverse” select and ultimate scale of current cost of insurance charges. This means the mortality margins, which are designed both to cover expected death claims and to recover other product expenses, start out high in early durations and grade off over 15 to 20 years. These margins are a significant source of profitability.
Guaranteed maximum COI charges are typically 1980 CSO mortality. Replacing this guaranteed maximum scale with the lower 2001 CSO table may significantly limit the level of current COI charges for many products, especially for issues ages below 50.
Insurers generally set VUL statutory reserves according to the Commissioners Reserve Valuation Method. For some contract forms, the calculated CRVM reserve may decrease. But for adequately funded contracts typical of the accumulation market, the cash surrender value often takes over as the reserve in early policy durations, meaning a significant decrease in statutory reserves might not be expected.
In addition, highly funded VULs could be further limited in the amount of premium the owner can pay under the 2001 CSO table. Specifically, guideline premiums and seven-pay premiums would generally be reduced by 10%-15% under the 2001 CSO table as compared to current levels for males. (As you will recall, “guideline premiums” define maximum funding limits under the Internal Revenue Code Section 7702 definition of life insurance; and “seven-pay premiums” define maximum funding limits to avoid modified endowment contract status.)
Furthermore, maximum first-year surrender charge limits will be reduced for most issue ages and risk classes.
Higher issue ages, generally 65 and above, would not be affected because of the formulas current cap. Reductions are as much as 15% for the cells we tested. Depending on specific product design, this could reduce an insurers surrender margins, forcing the company to shift from a surrender-contingent load to one thats more visible.
Two positives that might result from the new table are:
–The 2001 CSO tables 121 maturity age may eliminate the need for extended maturity provisions. Such provisions are common on many of todays UL and VUL products, but they are often a source of administrative and design complexity because of numerous state-specific variations.
–Premium requirements for no-lapse guarantees may be reduced, because of improved valuation mortality.
As you can see, insurers will be challenged to redesign their VUL products because of the reduction in margins from COI charges and, perhaps, maximum surrender charges.
To maintain current levels of profitability (and competitiveness), they may need to find additional sources of profit, either by introducing new loads or by increasing existing premium-based or per policy loads.
The shift from COI margins to more visible loads and possibly a more complex load structure may not sit well with consumers or distributors. As well, the effect of these new load structures on illustrated values and competitive goals may not be straightforward, making this redesign a challenge.
Nancy M. Kenneally, FSA, MAAA, is a consultant with Tillinghast-Towers Perrins financial services practice in NewYork. Her e-mail is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, April 8, 2002. Copyright 2002 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.