2001 CSO Products? Somewhere In The Pipeline

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.