Studying emerging issues in the life insurance industry helps identify what the possible product trends might be.
The Society of Actuaries has created a committee–the Emerging Issues Advisory Group (EIAG)–that tracks those issues. Its subcommittees track issues in discrete areas, including regulatory issues, tax issues, product trends, demographic changes, global business environment and technology changes. This article concentrates on a few items now being tracked in the product trend area. (See box.)
Changing reserve methodology. The Universal Life Working Group of the American Academy of Actuaries expects to expose for comment a report on a new life insurance reserve methodology by year-end. The rationale behind this sheds light on how such a change can impact product trends.
Statutory reserves are thought to be redundant, which puts the life insurance industry at a competitive disadvantage relative to other financial industries. Recent changes to reserve methodologies and an increase in the number of preferred underwriting classes have caused statutory reserves to far exceed economic reserves, relative to products prior to the 1990s.
The reserve redundancy has caused insurance companies to use reinsurance, securitizations and complex product designs to reduce the impact of the high reserves. These solutions add to the cost of doing business in the life insurance industry.
The new reserve methodology is a potential win-win-win situation because:
o The policyholders will be able to purchase more efficient, and therefore more affordable, life insurance policies (though there may be an increase in insolvency risk).
o The insurance industry will be able to reduce complexity in insurance transactions.
o The regulators will feel more comfortable with reserves that will be customized to fit each company and will have extensive disclosure and peer review.
A domino effect of the reserve change will be a change in the Standard Nonforfeiture Law. Companies will be able to design products with less strenuous requirements on the cash values, allowing policyholders greater choice between a death benefit protection policy and an accumulation policy.
The reserve and nonforfeiture change will reduce the need for complex product designs that currently are found in the universal life with secondary guarantee marketplace.
Litigation. Another issue that may simplify the product designs is the increase in litigation. Policyholders are having a more difficult time understanding the policies they are purchasing in the current environment. Today’s variable products have a multitude of funds with varying fees and different benefit riders; equity-indexed products have varying participation rates and methods of applying indexes to the account values; and universal life with secondary guarantee products have complex side funds.
The complexity is placing a strain on company compliance and marketing areas to describe the products to producers. This, in turn, is placing pressure on producers to explain the products to policy owners. Increased litigation within the life insurance industry invariably results. Designing simpler products with fewer moving parts will create more efficient products, which should help reduce some of this litigation.
Low consumer savings rate. The third issue is the reduction in the savings rate of American citizens. The U.S. Department of Commerce’s Bureau of Economic Analysis says the average savings rate as a percentage of disposable income in 1985 was 8%. Today, the savings rate is 0%. This is hard to believe and certainly requires a change in attitudes toward personal investment. In addition, many retirees are taking a full cash distribution at time of retirement.
One way to keep retirees’ money safe is through use of more innovative annuity payouts. Most payouts today do not offer much variety in the growth rate of funds still held in the account. A trend has started and may continue that allows policyholders the choice of depositing money into a separate account or indexed fund for their annuity payouts.
Aging population. There will also need to be advancements in product designs focused on the senior market. With today’s aging population and increasing life expectancies, more and more seniors need insurance products. This will cause insurance companies to increase issue ages, refine underwriting requirements and offer riders specific to the needs of the elderly.
The insurance industry already has seen a dramatic increase in accelerated death benefits for critical illness and long term care riders. The number of riders will continue to increase and continue the trend toward combining life insurance with long term care and health insurance benefits.
These are only four of the many issues now being tracked that will impact future products. The insurance industry will continue to evolve to meet the financial needs of the young and old.
Keith Dall, FSA, MAAA, CLU, ChFC, is a consulting actuary with Milliman in the Indianapolis office. His e-mail is email@example.com.
One way to keep retirees’ money safe is through use of more innovative annuity payouts
Below The Surface
1. Changing reserve methodology
2. Increased litigation
3. Low consumer savings rate
4. Aging population
Source: Keith Dall, Milliman, Indianapolis