First Round Of Texas Survey On Small Face Amount Policies Unveiled

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A sketch of small-face amount policies in Texas and claims being paid out to Texas policyholders is starting to come into focus, the result of an initial survey by the Texas Department of Insurance.

The survey, released last month, found that the average death benefit for industrial policies was $575, compared with $4,248 for debit ordinary contracts, $2,789 for pre-need policies, $6,324 for other term contracts and $5,057 for other whole life policies.

The findings are results from 172 companies that had policies of $15,000 or less in death benefits still in-force in Texas as of Dec. 31, 2001.

The survey is required under Texas H.B. 2415. A final report must be submitted to the Texas legislature by year-end 2002.

The requirement is part of a wave of national concern that contract holders of small face amount policies, typically defined as policies with face amounts of under $15,000, were paying premiums in excess of the face amounts on their policies.

The survey also indicated wide divergences in benefits paid in relation to premiums collected for individual product categories.

However, Mike Boerner, managing actuary with the department, cautions against reading too much into those often large discrepancies.

For the 172 companies, the ratio of death benefits paid to premiums paid was 168.34% for industrial policies; 35.51% for debit ordinary contracts; 32.02% for pre-need policies; 36.13% for other term contracts and 37.15% for other whole life contracts.

Boerner explained why care must be taken not to draw conclusions from these results. In the category of industrial policies, for instance, Boerner says the paid loss ratio can reflect a number of factors such as the decline in the number of industrial policies being marketed or sold in Texas.

Indeed, in its 1997 Fact Book, the American Council of Life Insurers found that the face amount of individual industrial life policies had declined 3.3% to $19.32 billion in 1996 from $20 billion in 1995. In a 10-year period from 1986 through 1996, the total had dropped to $19.32 billion from $27.2 billion in 1986.

Conversely, the large paid loss ratios for industrial policies does not necessarily mean that companies are losing money on these contracts, Boerner continues.

Many contracts may have been accumulating reserves for years to cover benefits paid, he adds.

And the higher payout ratios could reflect that policies in force for years are more likely to be contracts in which claims will be filed, he continues.

In categories where the ratio of death benefits paid compared with premiums paid are low, Boerner says figures might not reflect nonforfeiture and other benefits associated with a contract.

Bill Goodman, special litigation counsel with the department, notes that 172 of 758 companies to which surveys were mailed out had business directly relating to the survey and sent in responses. A total of 436 did not have business relating to the survey. Initially, 131 companies did not respond to the department’s inquiry. However, Goodman says, a second request has reduced that number to fewer than 30 that have yet to respond.


Reproduced from National Underwriter Life & Health/Financial Services Edition, May 6, 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.