Small Face Amount Debate Goes On As Texas Readies Report

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How much is too much for consumers of modest means to pay for a policy with a small death benefit?

The debate going on in Texas right now reflects how regulators and legislators nationwide are grappling for the right answer to how many times face amount a consumer should pay for a policy.

And, as the Texas insurance department readies a report for the states legislature due at year-end, the answer may be more intuitive than specific, interviews suggest.

The report is in response to H.B. 2415, legislation signed into law in June 2001 that requires a report on the issue to be delivered to the Texas legislature by year-end 2002.

In fact, a number of possible answers are being floated. Disclosure, cost control, banning the sale of small face amount policies, and limiting the number of times premium can exceed face amount are just some of the starting points being deliberated.

During a series of hearings this year, consumer advocates have raised possibilities including premium caps and offering policies other than guaranteed issue.

Mike Boerner, a life actuary with the Texas insurance department, who is helping to spearhead the effort, says that personally he thinks that proper disclosure could be a solution. “Information never hurts unless it is too costly.” And, he adds, that in this case, disclosure would not need to be too costly.

The next question, he adds, is what kind of disclosure should be required?

One possibility, he says, would be to inform potential policyholders of what they may pay relative to face amounts received in the future.

But there are other possibilities that could be explored, he adds.

Picking up on the idea broached during hearings, Boerner says that potential policyholders who are in good health could be advised that a guaranteed issue feature may not be necessary.

A guaranteed issue feature ensures that the contract will be issued but includes the cost of the companys risk of not underwriting in the contract.

Another possible solution that has received discussion, he says, is to cap the multiples of premiums that could be paid on a small death benefit policy. But, he cautions, the “con on a cap would be that it is hard to find a one-size-fits-all that works.”

Lapse rates, he says, tend to be approximately 50% over the first couple of years that a policy is in force, so those who keep a policy in force longer end up paying more of the costs related to a policy block of business.

One solution may be to lower cost through distribution such as Internet marketing, he adds. Results from a survey done by the Texas department indicate that there is potential to hold down expenses.

But then, for companies, the question becomes one of whether such distribution will make it possible to reach target markets, he continues.

Leslie Jones, who is with the South Carolina insurance department and is chair of a subgroup that is looking at the small face amount policy issue, says there could at the very least be an option to fund the contract using a reduced number of premium payments.

If products are appropriately priced, then it is a matter of disclosure but if they are inappropriately priced, then a stricter approach is needed, she says.

In general, Jones continues, it is better not to limit product offerings, but instead, to make sure that consumers know what they are buying and that product features are fair.

Choices such as offering a reduced number of premium payments with higher amounts may be problematic because “people buy what they buy because they can afford it. If premiums are going to increase, people wont be able to afford a smaller policy or will take smaller face amounts,” says Scott Cipinko, executive director with the Life Insurers Council, Atlanta.

Capping premiums raises another consideration, Cipinko says. If premiums are capped, a companys continued solvency must also be looked at, he adds.

Companies expenses are not just related to the choice between using a sales force or direct marketing and Internet distribution choices, says Cipinko. Rather, the cost of insurance included in contracts covers administrative, compliance and other costs, he says. Those costs must be factored into the premium charged irrespective of whether contracts are sold through direct marketing channels or not, he adds.

Donna Claire, a life actuary with Claire Thinking, Fort Salonga, Long Island, says disclosure is important. However, as for “forbidding products in general. I dont like that idea,” she adds.

When asked if opening a savings account may be more cost efficient for consumers than the purchase of a small face amount policy, Claire says it is an option “if I have the discipline to save and dont expect I will need the face amount soon.”

It is important to have these policies in place, she says, because many of them are used for final expenses, including burial costs.

But, consumers may be less likely to purchase policies if, for instance, the number of premium payments are reduced, according to Alex Zeid, principal, FMSI, Deerfield, Ill. Those with budget constraints may be less willing to buy a policy with larger premiums, he continues.

The reduced premium suggestion has been raised because those who pay premiums for longer periods of time are more affected by paying in excess of face amount.

Underwriting potential policyholders rather than just issuing contracts is expensive even if medical tests are coordinated with a visit the consumer would ordinarily make to a doctor, says Zeid.

And, direct marketing is not necessarily a way to reduce fixed costs in a product, he continues, because reduced fixed costs depend on the effectiveness of a direct writing campaign. As an example, Zeid says if a response rate is 0.1% rather than a more typical 2%, then direct marketing would not cut costs.

Another distribution channel that has been raised during discussions is the Internet.

But as life actuaries such as James Miller, a vice president with Ohio National Financial Services, Cincinnati, explain, establishing and maintaining a Web site also involves fixed costs.

And, according to a study conducted by LIMRA International, Hartford, Conn., currently Internet users tend to be better educated and more affluent than those who dont use the Internet.

Such a group, according to interviews, is not traditionally associated with the small face amount marketplace.

The LIMRA study found that the average Internet user is 39.3 years old, has a college education or has done postgraduate work, has a median household income of $70,900 and average total assets of $38,700.

Those with household incomes of under $20,000 represented 8% of all users and 20% of all non-users while those with household incomes of $20,000-$29,999 and $30,000 to $39,999 each represented 10% of users and a respective 16% and 13% of non-users.

However, the study found that going forward, those with more moderate incomes are more likely to use the Internet.

About two out of five new Internet users in 2000 had a high school education or less and the percentage of households with incomes of under $30,000 that use the Internet grew from roughly 12% before 1996 to approximately 35% in 2000, the LIMRA study found.

Another possible solution is to sell insurance through the workplace, Miller says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 6, 2003. Copyright 2003 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.