What is ahead for the individual term life insurance market? What varieties will succeed and what will happen to prices?
This article looks at those questions. First, an update.
Term life insurance has been a staple product offering of the life insurance industry for over 20 years. This market definitely has zigged and zagged during this period, reflecting changes in the posture of reinsurers, approaches to underwriting and risk classification generally, and the fine-tuning of premium guarantee periods. Even so, the products have maintained a strong position in meeting the public’s need for basic, low cost life insurance.
Now, in the mid-2000s, term life insurers once again find themselves steered by winds of change in the market.
For example, reinsurers significantly have tightened their pricing of all products, including term. At the same time, reinsurers have strengthened their audits of direct companies’ underwriting and claims practices.
In addition, term products face strong competition from low cost universal life with secondary death benefit guarantees. Concurrently, return of premium riders on level term plans have penetrated the market as a new differentiator between products.
As older term business ages, approaching and crossing through the end of the level-premium period, insurers have begun developing in-force reissue programs for healthy, persisting lives. For business beyond the level-premium period, insurers are seeing their first credible mortality experience resulting from anti-selective lapses driven by high annually renewable term renewal premiums.
So, what’s next? The correct answer to this question is, of course, “it depends.” The main dependencies relate to reinsurer behavior, mortality patterns and the effect of new reserve initiatives.
From the perspective of an interested market observer, here is a brief prediction of future term direction for the next 5 years.
Reinsurer positioning: There will be continued tightening over the next 2-3 years, then some loosening, as some reinsurers shift focus more to top-line growth.
Product popularity: The 20-year level term product will strengthen its hold on the market, while the 30-year term products gain some relative share.
Risk classes: Although preferred underwriting criteria at some carriers will be fine-tuned, the industry still will be dominated by 3 or 4 non-tobacco classes and 2 tobacco classes. Emerging mortality experience will cause carriers with more or fewer risk classes to adapt to the common industry structure.
Underwriting: More internal assessments of underwriting practices and procedures will occur, leading to greater attempts to leverage technology, mine data, reduce attending physician statements and underwrite smarter. Table-shaving will largely disappear.
Price: The general trend will be toward slightly higher prices over the next few years, although price movements will vary across pockets of policyholders–specifically, preferred rates for issue ages 50-59 will see more downward price pressure. The high end of the issue age range for term products will also increase.
Capital and reserve requirements: The movement to the 2001 CSO Mortality Table generally will lower term reserves, while the drop in the maximum statutory annual reserve interest rate to 4% will increase reserves; the net effect varies by age, class and gender but more often will produce lower reserves compared to current levels. The move toward principle-based reserving will also impact statutory reserve levels, probably reducing them, as such techniques become the prevalent reserve approach.
Riders and features: Return of premium features will expand, with some varieties appearing that offer greater premium refunds for specified contingent events such as hospitalization, disability or casualty losses; more products will be structured with unique death benefit provisions, such as charitable gift tie-ins, or requirements that all or a portion of the death benefit be paid out as an income stream.
Agent compensation: Commissions will not change much, but the changes that do occur will be geared more toward levelizing agent compensation, at least over the first few years.
What will happen to term life’s share of the market? I think it will increase slightly for 2 reasons: First, the prevalence of more ROP riders boosts average premium size; and, second, term life is becoming the showcased product in emerging attempts to address the lack of insurance in the broad lower- to middle-class population.
Term life has hit some recent bumps in the road, but this is not the first time. New features and markets, as well as competitive prices, will keep term life front and center in the life insurance world.
Timothy C. Pfeifer, FSA, MAAA, is a principal in the Chicago office of the Milliman USA actuarial consulting firm. His e-mail is email@example.com.
New features and markets, as well as competitive prices, will keep term life front and center