As I write this in the fall of 2003, businesses are increasing inventories again. They are buying new equipment and slowly increasing employment.
That suggests the market for business and individual insurance certainly will increase in 2004. This is great news for the life insurance business, which has endured a few difficult years along with rest of the nation.
Given the continued low interest rate environment and the recent gains in the stock market, that trend has led me to anticipate the following for 2004:
First, universal life with no-lapse guarantees (“term to age 100 and beyond”) will continue to be a strong seller.
Second, after 3 years of continued sales declines, variable life will rebound and begin to increase overall life premium market share in 2004. (This is based on the common belief that VUL sales follow the market by 6 to 9 months.)
Since reaching those 2 conclusions, however, 2 situations have arisen that will affect the life insurance industry, at least in the near term. These are changes in the reinsurance marketplace and the unfolding of the mutual fund scandals.
Will these new factors affect the direction of the above life sales predictions for 2004? Yes, they will make the predicted outcomes even more likely. Here is why.
First, the reinsurance marketplace. For years, reinsurers have been aggressive in competing for business. In fact, its not uncommon today for many companies to use reinsurance not only for highly rated or “over retention” limit policies but also from first dollar. Many companies reinsure 80% to 90% of the first dollar of premium with the reinsurers.
This has had the effect of smoothing out company earnings and providing capital-intensive reserve relief for certain productsespecially long-term guaranteed level term and universal life with no-lapse guarantee riders.
But with interest rates low and the cost for letters of credit (extremely important to reinsurers) increasing, there is upward price pressure on reinsurance quotes.
Also, the reinsurance market has consolidated over the past few years. Back in 1995, there were 18 U.S. reinsurers having market shares of 2% or greater. Today, only 12 reinsurers have a market share of over 2%.
Along with consolidation, the reinsurance companies may have become too successful in winning business. Capital levels of the top reinsurers have declined to the point where their ratings have been lowered. This is forcing them to go to the capital markets for more money, just to maintain their current ratings.
The bottom line? At the very least, reinsurance rates will increase. In a worst-case scenario, reinsurance may not be available for certain product lines. This could lead to “fire sales” next year.
My guess is that sales of long-term guaranteed level term and universal life with no-lapse guarantee riders will spike in 2004, before these heavily reinsured product lines are updated with new reinsurance pricing.
But even after the spike, if interest rates stay low, it is likely that these lines will continue to be top sellers. The sales may drop a little in the post-spike era, but they should generally remain strong.
Second, the mutual fund scandal will overflow into variable life and annuity subaccount analysis.
For companies selling variable life and annuities, in addition to proprietary subaccounts, it was always important to have “brand” name subaccounts available.
Unfortunately, the scandals at a few companies are still in the early stages, and we cannot predict what is going to happen in the future.
Right now, it doesnt look good. Alger, Strong, Invesco, and Putnam have been very successful as variable subaccounts. Will individuals be turned off by buying variable life and annuity products because of these subaccount names?
Now will be the time for the “unknowns” to gain market share. Company proprietary subaccounts and lesser-known brand names will be the big beneficiaries.
Financial advisors and planners are at least rethinking, and many times reallocating, customer subaccount choices, especially when a firm like Putnam can lose $7 billion in assets in one week.
You will be the expert that your clients will look to for recommendations.
In sum, my prediction is, both guaranteed level term and universal life with no-lapse guarantees will be “strong sells” in 2004. Variable life will begin to “sell” well in the 2nd quarter, and whole life will continue its current sales pattern.
Michael S. Pinkans, CFA, CFP, CLU, ChFC, is a registered representative and investment advisor with Equity Services Inc. and vice president of sales and promotion at National Life Insurance Company, Montpelier, Vt. His e-mail address is [email protected].
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 19, 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.