Some life insurers could have serious universal life insurance pricing problems.[@@]
Analysts at Moody’s Investors Service, New York, come to that conclusion in a report on “secondary guarantees” sold with aggressively priced UL policies that emphasize death benefits rather than cash value.
A UL policy is a flexible-premium life insurance policy. The issuing insurance company deducts mortality expenses from policy values and increases accumulated cash values by applying a crediting rate based on the interest rates that the insurer earns on its own investments.
The secondary guarantees discussed in the report include no-lapse guarantees and “shadow account” guarantees that keep policies from lapsing even when high mortality costs and poor insurer investment performance drive policy cash values to 0.
Life insurers hope that interest rates will be high enough to help them support the guarantees, and that some policyholders will drop their coverage and let surrender charges flow into the accounts that back other policies.
Under most conditions, life insurer UL assumptions should work well, but, if interest rates stay low and low interest rates encourage customers to hold on to their policies longer than expected, aggressive “insurers writing these policies could suffer potentially large losses,” the Moody’s analysts warn.