Premiums are up and expenses down for 50 top insurers as ranked by premium and annuity considerations. But differences in product mix and distribution channels continue to impact individual companies’ performances.
Premium and annuity considerations for these 50 companies increased by 14.31% in 2004 over 2003, and contract expenses as a percent of premium declined to an average 11.8% from 14.6% in 2003, according to data culled from the NAIC annual database as compiled by National Underwriter Insurance Data Services/Highline Data.
The data also suggests these top 50 companies held the line on lapses as a percent of average in-force, ordinary life business. In 2004, lapses averaged 6.8%, slightly over 2003′s 6.7% rate.
Lapses in 2004 ranged from zero to a high of 32.7%. Thirty-one companies witnessed a decline in their lapse percent; 13%, an increase; and, 6% were flat.
Lapses in 2003 ranged from zero to a high of 25.9%. Twenty-five companies saw declines; 19, increases; and, 6 remained unchanged.
Lapses in 2003 ranged from zero to a high of 25.9%.
In 2004, insurance expense as a percent of premium ranged from a low of 3.8% to a high of 29.1% for these top 50 companies. A total of 30 of the top 50 companies saw declines in their expense ratio, 18 went up, and 2 were flat.
In 2003, the range of insurance expense as a percent of premium went from a low of 5.3% to a high of 88%. Twenty-four companies saw declines and 26 saw increases in insurance expense in relation to premium.
One of the biggest contributors to expenses are commissions paid, says Paul Graham, vice president insurance regulation, and chief actuary with the American Council of Life Insurers, Washington. The shift from life insurance products to annuities is lowering the cost structure as a percent of revenue, says Graham.
The difference in commission is significant, he continues. For whole life insurance products, commission can be up to 50% of first-year premium compared with 3%-5% of first-year considerations for annuity products, he adds.
Thus, Graham explains, small changes in a company’s product mix can drive expenses a great deal. For instance, he says, a shift from whole life products to term or lower premium universal life products can cut a company’s expenses.
Annuity writers need to maintain a lower commission structure because they are competing with banks and mutual fund companies that can provide these products at low cost, Graham says.
Health carriers would have higher expense and lapse ratios, Graham continues, because often they have to pay multiple claims to the same plan participant instead of just one payout at death or termination of the contract.
Lapse rates for health carriers also could be higher, according to Graham, because medical insurance costs can go up annually, which would encourage employers to shop around for a new carrier.
Graham notes a caveat that should be considered when examining expenses. If a company has reinsured business, expenses could be skewed, he says. In early years, the allowances to the ceding company may be in excess of expenses and in later years following the transaction, those expenses can be recaptured, he says.