After some years of turmoil caused by negative publicity and uncertain legislative activity, the corporate-owned life insurance market seems to have turned a corner and is poised for a rebound, according to the consensus of a panel of industry experts.
Speaking at the annual meeting of the American Council of Life Insurers here, George Braunegg, executive vice president, CAST Management Consultants, said, “We dont think there is any question that 2003 was a terrible year” for the COLI market.
The likelihood, he said, is “a probable 35% to 45% drop in volume” in the COLI market in 2003 from 2002s total of $1.2 billion. But there is also likely to be an increase in 2004 volume from 2003, Braunegg said; the question is how much that rise will be.
Despite that projected increase in volume, Braunegg cautioned against underestimating the effects of what happened in 2003 continuing in 2004. Some of the lingering issues, he explained, were “the chilling effect” that Sarbanes-Oxley has had on companies in the market (“it has put the fear of God in corporate executives”); lower executive bonuses, resulting in less of a need for deferrals; less confidence that the company would be around to fund the benefit; and uncertainty relating to legislation that is giving rise to the attitude why buy until the picture becomes clearer?
Regarding legislation, Laurie Lewis, ACLI vice president and chief counsel, federal taxes, said that with the COLI amendment the Senate Finance Committee included in the NESTEG pension bill, S. 2424, “companies can sell with some confidence that whatever legislation is finally enacted wont be substantially different” from the amendments language.
While cautioning that the amendment only has passed the Senate Finance Committee and still needs full Senate and House approval, Lewis said the amendment “addressed the main concerns raised in the media and by COLI opponents.”
In general, she said, what the amendment says is that “death benefits paid from COLI contracts that do not meet the requirements of the new amendment will be taxable and that employee notice and consent are required.”
But the exceptions to death benefits from COLI being taxable should go far to ensuring the continued viability of the market, she said. In short, the death benefits from COLI are not taxable, Lewis said, if:
–the deceased individual was an employee within 12 months of death or a director; or,
–the death benefits are payable to the employees family, beneficiary, estate or are used to purchase an equity interest in the employer; or,
–the employee is a key person, which is defined as a director, a highly compensated employee (currently income over $90,000) or a highly compensated individual (salary in the top 35% for the employer).
This last shows that the amendment is not overly restrictive and “means employers can insure the top 35% of their employees,” Lewis said.
David Boyle, vice president, executive benefits, New York Life, said it was unlikely that COLI legislation would be passed before the November elections and “will likely slip into 2005.”
The current proposed legislation, he continued, is “generally acceptable to the industry.” However, the effective date issuemeaning whether the legislation is prospective or retroactive”still needs resolution.”
Looking ahead to 2005 and beyond, Braunegg saw the beginnings of some significant changes in the overall COLI market. Some of these, according to Braunegg, include:
–Wall Street alternatives to COLI gaining some market share at the expense of life insurers.
–Simplification of design pushing distributors to differentiate on service and customer-facing technology.
–Consolidation of distributors to deal with issues of scale and administration.
–Administration being left to a few huge players, possibly including mutual fund companies like Fidelity.
–The likelihood of Fidelity and other mutual fund companies jumping into the market.
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.