Challenges hurtling out of Washington could hurt the business
U.S. group life insurers continue to wrestle for new business while facing rising health insurance costs and blasts of disdain from Washington.
The financial statements that insurers are sending to the National Association of Insurance Commissioners, Kansas City, Mo., show that the insurers are winning plenty of new business but having trouble increasing the amount of new group life business actually in force.
The number of new group certificates issued rose 18% between 2003 and 2004, to 26 million, and the face value of the new coverage issued rose 4.9%, to $1.1 trillion, according to National Underwriter Insurance Data Services’ tabulations of the NAIC data.
Total group life premium revenue rose 9.8%, to $28 billion.
But net gains plateaued at $2.7 billion, and the total number of group life certificates in force fell to 189 million at the end of 2004, down 0.7% from the total a year earlier, according to the NAIC data.
Executives in the group life market say the market is so competitive partly because skyrocketing group health costs are consuming more of benefits managers’ attention and budgets.
Employers “are so focused on health care costs, the group life piece is just sort of taken for granted,” says Jennifer Borislow, president of Borislow Insurance Inc., Methuen, Mass., who has been selling group insurance products for 24 years. “The insurance companies are struggling with rates coming down.”
Deanne Strable, senior vice president of specialty benefits at Principal Financial Group Inc., Des Moines, Iowa, is observing the same kind of fierce competition.
“Group life is a somewhat commoditized product,” Strable says. “We’re not seeing a lot of new products.”
Survey results from the federal Bureau of Labor Statistics hint that pressure may be even greater on the West Coast, in the BLS Pacific region. Employers throughout the United States seemed to shift to somewhat lower group life benefit levels between 2003 and 2005, but the change was especially prominent in the Pacific region.
There, at plans where the death benefit is based on a ratio to the employee’s earnings, the percentage of group life plan members getting death benefits equal to two or more times earnings fell to 28% this year, down from 38% just two years ago.
For the most part, “people are still holding on to the group life plans,” Borislow says.
But many employers are reducing the amount of employer-paid coverage or holding it steady while encouraging employees to buy employee-paid supplemental coverage, Borislow says.
Meanwhile, group life market players have landed in the middle of two major battles in Washington: one over efforts to extend and expand the federal Terrorism Risk Insurance Act program, which now excludes group life, and the other over efforts by the President’s Advisory Panel on Federal Tax Reform to develop ideas for revamping the federal income tax system.
At press time, the outcome of the TRIA extension fight and the fate of the tax reform panel recommendations were unclear.
Emil Henry Jr., assistant secretary of the Treasury for financial institutions, said earlier this month that Congress should keep group life out of TRIA because the group life market is doing well, even though it has been excluded from TRIA in effect until now, and because the administration believes group life insurers have made too little use of private reinsurance.
“Group life insurers are lobbying mightily for an expansion,” J. Robert Hunter, insurance director at the Consumer Federation of America, Washington, and Travis Plunkett, the CFA’s legislative director, wrote in a letter sent to Senate leaders. But “there is no meaningful evidence that justifies expanding TRIA to cover group life insurance,” they wrote.
Meanwhile, government officials say a massive nuclear, biological or chemical terrorist attack could cause tens of billions of dollars in life insurance losses.
In the event of a huge terrorist attack, regardless of what insurance and reinsurance programs were in place on paper, the federal government probably would have to step in to help group life insurers cope, if it were in a position to do so, says Thomas Corcoran, a principal in the Hartford office of Tillinghast-Towers Perrin.
“You really can’t walk away from it,” he says. “People need the benefits to survive.”
Over in the tax reform arena, the president’s tax reform panel drew the most attention by proposing a new cap on deductions for home mortgage interest payments. But the panel also has proposed a cap on the deductibility of group health premiums and elimination of deductions for most other fringe benefits.
“The panel recommends that the cost of employer-provided fringe benefits, such as child care, life insurance premiums and education costs, not be subsidized through the tax code,” panel members wrote in their report. “Among workers for whom the benefit is available, more of the benefits go to high-income taxpayers, even though they are paid for with higher tax rates for everyone.”
In theory, radical reform of the U.S. tax code could increase sales of principal-protected annuities and life insurance, by giving workers more investable income and creating new tax-advantaged accounts that could be used to buy insurance.
At this point, however, the National Association of Insurance and Financial Advisors, Falls Church, Va., dislikes the tax reform panel’s account proposals because it believes they would encourage a short-term outlook rather than the kind of long-term planning and saving encouraged by annuities and life insurance policies, says Michael Kerley, NAIFA’s senior vice president for federal affairs.
Threatening group life is a problem because, for low-income and middle-income workers, “the best place to get life insurance is at their employer,” Borislow says.
Few reps can make a living selling small life policies at the kitchen table, she adds.
At Principal, Strable predicts that elimination of group life premium deductibility would cause many workers and small employers to drop life insurance.
Already, “many people don’t think they need it,” Strable says.
Some group life participants are wondering whether the TRIA and tax reform controversies are signs that group life has a problem in Washington.
“I don’t know if I’d want to ring the alarm bell yet,” says Paul Graham, chief actuary at the American Council of Life Insurers, Washington. “But attention needs to be paid to the product.”
At NAIFA, Kerley emphasizes that many elements of the insurance industry are “taking a licking” right now.
“We all apparently have a big target on our backs,” says Kerley, who adds that he has a hard time remembering policy makers specifically attacking deductibility of group life premiums.
Congress built deductibility of group life premiums into the tax code when it set up the modern corporate income tax system in 1909, according to a BLS paper written by Michael Bucci.
Today, because of deficit spending at the federal level, “we’re in dire straits, and we’re looking to generate more revenue,” says Edward Graves, an insurance professor at The American College, Berwyn, Pa.
In this kind of climate, members of Congress look for ideas for changes that “raise revenue and won’t squeak,” Kerley says.
Strable and Hunter say they are not sure what will happen to the tax reform panel proposals. Although the CFA has opposed the inclusion of group life in TRIA, “we think group life is a fine benefit, especially if it’s a good deal,” Hunter says.
But Congress could cut back group life premium deductibility if it gives the tax reform panel recommendations serious consideration, Hunter says.
“People will fight to the death to keep the home mortgage deduction,” Hunter says. “If they’re willing to take away the mortgage deduction, this will go.”
Graham says group life may face specific kinds of lobbying challenges in Washington.
“Because [insurance] is regulated at the state level, there’s not a lot of expertise on insurers and the products they write” in Washington, Graham says.
Many of the insurance specialists who are in Washington are focusing mainly on health insurance or pension projects.
Group life insurers have tried to overcome lack of awareness by hiring Philmore Anderson, a managing principal at D.C. Navigators L.L.C., Washington, to speak up for them in Congress on the TRIA fight. The Hill, a newspaper that specializes in covering Congress, has described Anderson as a “lobbyist with a license to win” in a listing of top lobbyists.
Insurance agents and brokers also could play a role, by getting employers to talk more to policy makers about the value of group life, Strable says.