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Product Mi, Distribution Impact Ratios

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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.

Kevin Ahern, a managing director with Standard & Poor’s Corp., New York, says that, in general, costs are trending down, in part because companies are making an effort to become more efficient. He says that when analyzing premiums, guaranteed investment contracts should be factored out since there tends to be very little overhead associated with them.

But, he notes that overall, consolidation, improvements in areas such as technology and management’s desire to improve bottom lines are advancing expense improvements.

Expense efficiencies can make a difference in returns, he says. For instance, Ahern says it is a factor in the 15-20% returns banks average compared with the 10-12% returns in the life insurance industry.

Factors including the potential cost of corporate governance initiatives such as the Sarbanes-Oxley Act of 2002 could cause expenses to trend upward in the future and could contribute to further consolidation, Ahern says.

Companies commented on their results for both years.

Distribution structure and product mix are key things to look at when comparing expenses as a percent of premiums, says Barry Belfer, a vice president-finance with Guardian Life Insurance Company of America, New York.

Stock companies, Belfer says, sell a different mix of business that includes a lot more annuities, while mutual companies sell more whole life, variable life and universal life products. In addition, stock companies sell very high dollar amounts of business and pay small commissions because they are selling through brokers rather than through the career agency system, he continues.

Another factor, Belfer notes, is that the premium line in the annual statement now includes GICs, COLI/BOLI business and deposit contracts. Several years ago, before changes to reflect Codification of Statutory Accounting Principles, these deposit-type contracts were aggregated on a separate line, he says. So, in the case of at least two major mutual companies, premiums in the denominator are higher and the expense ratio lower.

If deposit-type contracts are removed from the equation, such companies would have higher expense ratios, he says.

In terms of Guardian’s expense control efforts, Belfer says it has undertaken cost controls that have brought down the rate from 27.8% in 2001 to 20.7% in 2004. This effort included taking out $100 million in expenses by outsourcing IT operations to India, reducing staff and reducing field expenses a bit, Belfer adds.

The expense rate in 2004 at Unum Life incorporates expenses associated with a multistate settlement regarding payment of claims, according to Linnea Olsen, director of investor relations with UnumProvident Corp., Chattanooga, Tenn.

In both 2003 and 2004, expenses were affected by commissions and expense allowances on reinsurance ceded, the company says.

Humana Insurance Company, Louisville, Ky., has businesses that include PPO operations, which have expense and lapse percents that run higher than pure life insurance companies, says Mary Sellers, a company spokesperson. Over the past 5 years, the average expense percent has been between 16.2%-18.2%, she adds. The expense rates also include the company’s self-insured business, Sellers says. That business is new and includes net administrative expenses but does not yet include the premiums that would offset those expenses, she continues.

A number of other companies did not return calls asking for comments.

One of the biggest contributors to expenses are commissions paid


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