Survey Indicates Some Insurers Might Limit Product Guarantees

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The investment slump of the past few years may have changed the way U.S. life insurance executives think about embedding minimum guaranteed rates of return in their products.

When Tillinghast-Towers Perrin, New York, conducted an informal survey of 26 life insurance company chief financial officers, it found that nearly one-third said their companies might limit sales of life insurance and annuity product guarantees in the next six to 12 months.

Thirty-two percent of the participating CFOs said their companies were responding to capital constraints and concerns about risk exposure by making plans to limit sales of some product guarantees in the near future. Eighty-four percent said their companies were revising product designs and product guarantees.

Fifty-three percent said their companies were thinking about changing product pricing, and 63% said their companies were adopting more extensive scenario testing.

In recent years, “insurance companies have focused on guarantees as a way to differentiate themselves in the marketplace and gain access to distribution,” Tillinghast researchers write in a summary of the survey results. “However, companies are finding that they need to be more strategic in their design and use of product guarantees to ensure they are meeting customer needs and their own financial objectives.”

Tillinghast researchers say the CFOs who participated in their survey agree that features such as guaranteed annuity death benefits and universal life no-lapse guarantees help their companies compete for business.

The share of participating CFOs who gave high importance ratings to minimum guaranteed interest rates on variable annuity fixed accounts was only 31%, and the share was only 37% for minimum guaranteed interest rates on universal life policies.

But 55% of the CFOs gave high importance ratings to minimum guaranteed rates on fixed annuities, and 65% gave high importance ratings to UL no-lapse guarantees.

Seventy-five percent of the CFOs agreed that VA guaranteed living benefits are extremely or very important, and 83% said VA guaranteed death benefits are extremely or very important.

Adding rich VA living benefit guarantees has helped big insurers win market share away from smaller insurers this year, says Hubert Mueller, a Tillinghast consultant.

But the survey authors note that, although insurers have been using reinsurance to back UL product guarantees, most have been issuing VA living benefits guarantees without use of reinsurance.

Eighty-eight percent of the participating CFOs worry about the cost of reinsurance, and 53% worry about lack of current reinsurance capacity.

Because of problems with getting adequate reinsurance, some insurers are studying the possibility of using hedging strategies, offshore entities or securitization to reduce the amount of capital needed to back product guarantees, Tillinghast researchers report.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 14, 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.