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2001 CSO Products? Somewhere In The Pipeline
So what is going on with the 2001 CSO Mortality Table? Should we be expecting something soon? What changes should we expect in product design?
First, an update: The 31st state recently adopted the 2001 CSO Mortality Table Model Regulation. That makes the table the prevailing commissioners standard table for tax reserves and for determining whether a policy is a “life insurance policy” as defined by Section 7702 of the Internal Revenue Code.
The American Council of Life Insurers promised to make a strong push to get all states to approve the new mortality table once the 26th state approved the table.
You would think that all this activity would create quite a stir in the insurance industry concerning the table, sparking a lot of research and development of new products that use the new table. But, while it has caused some interest and has resulted in the development of some 2001 CSO products, this activity certainly has not been at a feverish pace.
As one company actuary said privately, “There is a lot of talk, but not much action.”
The design characteristics of these new 2001 CSO products are discussed below, starting with a review of current activity at insurance companies concerning the table. Well also look at a few of the reasons why product development is limping along for now.
Insurers are in one of 3 categories concerning use of the 2001 CSO table in product development:
–They already have developed new products using the new table;
–They are testing the effect of the table on their products; or
According to an informal phone survey, it appears that most insurers are in one of the last 2 categories. Few have priced new 2001 CSO products and filed them with states for approval.
The hesitancy to use the 2001 CSO table in product development results from the many unknowns having to do with the table. For example, it is unknown when the remaining states will adopt the table (even though ACLI is pushing for quick adoption). As it stands now, over 60% of states have approved the table, leaving almost 40% with no approvals. It is difficult for insurers to expend a lot of energy creating products that can be sold in only 60% of the states.
Another unknown are the transition rules to the 2001 CSO table within Section 7702 of the Internal Revenue Code. The Treasury had said it was expecting to provide some guidance on these transition rules this summer, but with personnel changes at the Treasury, the guidance will be delayed. It is difficult to develop and file a policy without knowing the rules that must be followed.
Companies also are reluctant to move to the 2001 CSO table for accumulation-type products, because Section 7702 will further limit the premiums that can be placed into a policy and have the policy qualify as a life insurance policy. Similarly, the premium limitation for modified endowment contracts also is falling.
In addition, some companies that have tested the new table have discovered that the change in the product (e.g., lower cash values and reserves) results in too little change to warrant immediate action concerning the table. Why should they spend many resources working on a product that will have little impact in the market?
But the most telling reason for the slow development of 2001 CSO products is that companies currently have many other demands on their product development actuaries. These actuaries have little time to test the new table and create new products. Other issues are higher priority, pushing 2001 CSO product testing and development to the background.
For all those reasons, few companies are rushing to develop 2001 CSO universal life contracts. But some are developing their 1980 CSO universal life products in such a way that the product factorslike surrender charges and cost of insurance chargesare compliant with the 2001 CSO table. This will prevent product value changes when the product must change to the 2001 CSO table.
In other trends:
–The development of term products of any type is quiet these days. These products are currently often heavily reinsured. Companies are concerned that the new product will have less favorable reinsurance rates, so they are willing to continue with their current products.
–The traditional life market is where companies currently are developing 2001 CSO products. Because the 2001 CSO table has rates to age 121, whole life products either can pay premiums to maturity or become paid-up at an earlier age such as 100. Both of these premium periods already have been seen in new products.
–The traditional life products generally have reserves and cash values based on the ultimate tables of the 2001 CSO set of tables, rather than the select and ultimate tables, resulting in lower cash values and reserves. Some base the cash values on an interest rate higher than the valuation rate, which generally lowers the cash values even more. Whereas reserves are generally based on 4.5%, the cash values are based on 5.5% or 5.75%. This results in surplus strain to the insurance company when dividends are used to purchase paid-up insurance or when the policy becomes reduced paid-up.
As new 2001 CSO products begin to trickle into the market, we will begin to see creativity in new product designs. At the rate that new development is going, however, it may take awhile to see a pattern to this creativity.
Kent C. Scheiwe, FSA, MAAA, is a principal in the Indianapolis office of the Milliman USA actuarial consulting firm. His e-mail is [email protected].
Reproduced from National Underwriter Edition, October 14, 2004. Copyright 2004 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.