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Term And UL Writers Mull Reinsurance Needs After New CSO Table Kicks In

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The 2001 Commissioners Standard Ordinary Table adopted by the National Association of Insurance Commissioners will likely reduce term and universal life insurance rates, industry observers say. But the experts are less certain about the degree to which the improved mortality risks might affect the reinsurance market for level-premium term and universal life policies.

Robert Hupf, vice president and actuary in charge of life products for Mutual of Omaha, Omaha, Neb., says his company has done some planning as to what it will do but points out the earliest the new tables would take effect is Jan. 1, 2004.

“Even then, it would only be in effect in some states,” Hupf says. “Our company keeps only one financial statement for all states, so to lower our reserves, we would need every state to have adopted that table. So were probably not going to have anything on the street thats affected by it until, at the earliest, Jan. 1, 2005.”

Even so, industry executives foresee that the 2001 CSO tables could significantly reduce the impact of tighter reserving requirements imposed on many life insurance products by the Kansas City-based NAICs 1999 Valuation of Life Insurance Policies model regulation, more commonly known as Guideline Triple-X.

“2001 CSO will generally have little impact on Guardians deficiency reserves,” says Michael Barsky, pricing actuary for the Guardian Life Insurance Company of America, New York.

Carriers that currently use more conservative mortality tables could ultimately see significant reductions in their deficiency reserves, Barsky adds. However, Guardian, like a number of life insurers, has already adjusted rates downward based on its own reduced mortality projections, he notes.

“I dont expect any major changes in Guardians overall need for reinsurance on term insurance,” says Barsky.

Most of Guardians life business is participating whole life, which does not clearly benefit from the new table, Barsky notes.

“As such, I do not expect the new tables to have a significant impact on our business in the next few years,” he says.

“For a cash-value accumulation product, you would not expect much benefit from moving to the new table,” says Nancy M. Kenneally, a consultant with Tillinghast-Towers Perrins financial services practice, New York. “In fact, you might see some sort of negative consequences, because the table will reduce the guideline premiums and so will reduce the maximum amount that can be deposited in a policy.

“For products like term and whole life, there you would see reductions in premiums because of improvements in mortality,” Kenneally continues. “The reductions will vary by risk class and between males and females, but in general, you are likely to see reductions of between 10% to 15%.”

Reinsurers of term and universal life products believe that the market for their products will remain strong, even after most states adopt the new tables.

Robert A. Diefenbacher, regional pricing leader for the Employers Reinsurance unit of General Electric Company, Fairfield, Conn., says that because insurers will still have to meet Triple-X reserving requirements, he doesnt see the new CSO table making a big difference for his company.

“In general, I think the table is not going to have a huge impact on term products in the [reinsurance] industry,” Diefenbacher says.

Executives at Transamerica Reinsurance Charlotte, N.C., a unit of AEGON N.V., The Hague, Netherlands, predict that the term market will continue to grow and believe reinsurers will still be the primary source for funding that growth.

“While the 2001 CSO Table will change the dynamics of statutory reserving, there will be a lot of additional considerations, too, that are going to be very important,” says F. H. Alborn, director of business solutions for Transamerica Re.

The solutions that reinsurers offer for Triple-X will continue to be important, Alborn says. Moreover, he anticipated the demand for life insurers products would continue to grow.

“So, I dont think you are going to see any kind of a decline in the reliance on reinsurers to help manage growth for these companies,” he says. “This market was created because of Triple-X, because the reserves were too hard for term life companies to handle.”

Most life term insurers cede 80% to 90% of their business to reinsurers, Alborn says, although he predicts that ratio might decline some after the CSO Table kicks in.

“We will continue to reinsure the majority of [our clients] mortality risk in order to address a multitude of issues, one being the ability to increase the financial integrity of [life] companies as they grow their term portfolios,” Alborn says. “The CSO Tables are not going to reduce the need for reinsurance.”

Stephane Juliem, director of life solutions for GE ERC, says he thinks there will be a slight decrease in premium rates charged by reinsurers. On the other hand, he adds, their costs will also decrease.

Both Alborn and Juliem foresee growth for direct writers of term insurance and point out that reinsurers are ready to support that growth.

Reinsurers that mostly sell term will probably reprice their products as soon as their state of domicile adopts the table, to take advantage of lower basic reserves, they conclude.

Scott Robinson, an analyst with Moodys Investors Service, New York, thinks many direct writers will have to redesign their products to match the mortality table but that reinsurers will still grab a hefty share of the business.

“The CSO table is going to impact companies differently as far as profitability is concerned,” observes Robinson. “It may mitigate the impact of Triple-X, but I dont think its going to stop reinsurance business from being ceded offshore.”

The timing of the impact will not be the same on all companies, depending on which state in which they are domiciled, Robinson adds.

Life carriers that can redesign and reprice products quickly will be at an advantage, he says.

“Youre going to have to think ahead, because this isnt the kind of thing you want to do at the last minute,” he advises. “You have to tweak a lot of the policy design features, if youre going to maintain profitability.” But, he adds, “there is definitely going to be a market for offshore reinsurance. The new tables may impact reinsurance slightly, but its definitely not going to shut down the market.”

Its likely, however, that direct writers will retain more of the business than they do now under the new CSO Tables. How much they retain depends on demand for reinsurance and what the pricing will be like in the market, he adds.

“Over the past few years, reinsurance has been very attractive, and for a number of reasons, weve seen a lot of business being ceded,” Robinson notes. “Insurance companies, especially those that are publicly traded and want to minimize their earnings volatility, have ceded off more of their mortality. Because of the cheap rates, weve seen the industry in general get away from retaining mortality risks.”

Reproduced from National Underwriter Edition, February 17, 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.