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The variable life insurance market experienced remarkable growth in the 1990s, with premiums climbing from $1.03 billion in 1990 to a peak of $6.95 billion in 2000. That equals a 21% compound annual growth rate, according to Tillinghasts VALUE Survey.

Further, VL market share as a percentage of total life insurance sales increased fivefold from 7% in 1990 to 37% in 2000. All this occurred against the backdrop of a relatively stagnant life insurance market.

What is ahead for the industry in the next several years? The business is at a crossroads now, but it could see more growth if conditions are favorable. Before exploring possibilities, lets review the industrys past growth record and its current situation.

Sales in the 1990s were fueled by the significant growth in the equity markets, especially in the latter half of the decade. Both the number of companies selling VL and the number of products offered grew dramatically. In 1990, 36 life insurers offered 38 products. In 2002, 54 insurers offered 166 products, an average of three products per company.

Product manufacturers have expanded their accumulation-oriented VL portfolios to include survivorship VL, protection-oriented VL and single-premium VL.

As more companies have entered the marketplace, market share among the top players has become less concentrated. Market share for the top 10 VL players, as measured by new sales, shrank from 90% in 1990 to 59% in 2002 as competition intensified.

Changes have also occurred on the distribution side. Although still a dominant presence, career agents have lost share to nontraditional independent distributors. In 1995, career agents sold over 70% of new VL premium, while in 2001, sales through career agents accounted for just over 50% of total VL sales.

More recently, VL sales have experienced significant setbacks. Sales in 2001 fell 15% from their peak in 2000 to $5.9 billion. In 2002, sales continued to drop with equity market declines, finishing the year down 32% at $4 billion.

Today, the VL market is facing challenges. Equity market volatility and the sustained market downturn continue to exert downward pressure on sales and erode in-force account values.

Consumers have awakened to the risk inherent in variable products and may be hesitant to embrace equity-based products in the near term, notwithstanding a “buy low” investment strategy.

Despite low interest rates, many career agents have turned their attention to selling fixed products, such as universal life and participating whole life. Additionally, the number of career agents is declining while distribution costs associated with tied channels continue to climb.

Although investment-oriented independent distribution channels have grown rapidly, the insurance industrys ability to penetrate these remains low and the required investment to tap these channels may be high.

Finally, although the initial regulatory ambiguity concerning estate tax laws appears to have abated, many agree the issue will resurface. Future uncertainty here, as well as the continued scrutiny of the corporate-owned life insurance market, could impact some VL niche markets.

Future growth of the VL market is uncertain. In the near term, a key challenge for insurers will be to recapture the more than 40% drop in VL sales since 2000. Beyond that, insurers will be challenged to sustain long-term growth.

To forecast future growth in the VL market, Tillinghast developed a model to project future sales by retail distribution channel under three different scenarios. Each scenario reflects different equity market growth scenarios: baseline, high and low. The underlying model is supply-side driven, reflecting that constraints to future growth will not be driven by a lack of consumer demand for VL but by product manufacturers ability to maintain and expand distribution relationships in various retail channels.

The chart illustrates the five-year growth profile for the VL market developed by using this supply-side approach.

Realizing any of these growth scenarios hinges on a few key factors. The most critical is the pace and extent of an equity market recovery. The projections assume a sluggish first half in 2003 with gradual recovery, varying by scenario, over the balance of the year.

In light of recent events in the Middle East, however, further near-term instability in the equity markets might be expected, making even the low sales scenario difficult to achieve. Significant adverse “press” concerning the VL and broader insurance markets with respect to market conduct issues and unfavorable regulatory or tax events would also dampen growth.

In the near term, career and insurance-oriented independent agents and their customers must be convinced, again, that VL products are superior long-term protection and accumulation vehicles.

Less attractive fixed product alternatives could help make this point. For instance, the portfolio-based credited rates in UL will fall as companies must reinvest at todays low rates.

There will also be significant increases in required reserves for some ULs under the recent adopted Actuarial Guideline XXXVIII from National Association of Insurance Commissioners. Many agree that will lead to increased premiums and could make UL less competitive going forward.

To achieve the baseline or high scenarios and sustain growth in the longer term, VL insurers must significantly increase their penetration of investment-oriented distribution channels. This likely involves a basic redesign and simplification of both the VL product and the new business process as well as additional point of sale assistance.

The VL market has the potential for meaningful long-term growth. Product manufacturers willing to make the necessary investments to tap underpenetrated distribution will be well positioned to reap the benefits. Distributors, too, will benefit by providing clients with a superior long-term vehicle to fulfill protection and retirement income needs.

Nancy M. Kenneally, FSA, MAAA, is a consultant with Tillinghast-Towers Perrins financial services practice in New York. Her e-mail is nancy.kenneally@tillinghast.com.


Reproduced from National Underwriter Edition, April 7, 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.