Return of Premium Term Rates: Are They On The Rise?
Some insurers have priced return of premium (ROP) term life insurance by adding a ROP benefit to their “regular” term product, without modifying the underlying assumptions.
But, the ROP benefit creates special pricing issues that tend to reduce profitability. Now that ROP term has become increasingly popular with agents and consumers, insurers are beginning to consider these issues. Going forward, the industry may see companies increasing ROP term premium rates on their new products.
The key issue is the ultimate lapse rate. Ultimate lapse rates on products with ROP should be lower than on products without ROP, especially if the annual increase in the ROP benefit is greater than the annual premium.
ROP term is lapse supported, meaning insurers make higher profits (usually at later durations) from a lapse than they do from a policy that persists. If insurers use the same higher lapse assumptions to price ROP term as they use to price their non-ROP term product, then they may be underpricing ROP term.
A sample calculation shows that for a hypothetical 40-year-old male, the ROP premium rates for 20-year term would have to be increased by 28% to maintain the same profitability if the insurer were to reduce lapse rates for years 9 and later from 5% to 1%. Does this sound familiar? Premium rates for long term care insurance recently have increased primarily because insurers underestimated the ultimate lapse rates. Could ROP term become the next LTC situation?
Although the key issue is the ultimate lapse rate, ROP term insurers also are facing other pricing issues. These include:
Reserves: ROP term requires higher statutory reserves than term products without ROP because 2 additional reserves are required.