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.)