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Will Guaranteed Life Remain As Is? That's Not Guaranteed

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Guaranteed life products have been driving the industry for several years; however, mounting industry pressures may lead to a reversal of prior trends.

In 2006, current assumption universal life (UL) out-sold universal life secondary guarantee (ULSG) products, according to a Milliman survey in late 2007. Specifically, the UL market took 46% of sales while ULSG took 43%, with the remaining sales coming from accumulation UL designs.

Also, more insurers have tightened pricing on ULSG, especially in the older-age market, and companies are seeing their Regulation XXX and AXXX reserve levels climb to unprecedented levels.

There are several reasons for the tighter pricing or, in some cases, the acceptance of reduced profit margins. Some insurers have simply become less aggressive regarding older-age mortality rates and ultimate lapse rate assumptions. In addition, the low-interest-rate environment is continuing to put pressure on profitability of lifetime guarantees; and third parties (i.e., life settlement providers) are attempting to arbitrage the industry and capitalize on under-pricing at certain ages or premium patterns.

Compounding those challenges, financial institutions that have provided capital support to direct writers for ULSG products are now less able to match their prior levels of support for industry guarantees. This is because of general credit crunch issues or their own uncertainties regarding the risks in these products. We have observed this for traditional reinsurance on term and ULSG in the last few years, and recently with respect to securitizations of insurance.

The latter item came up during a March 28, 2008 special session of the National Association of Insurance Commissioners’ Life Health Actuarial Task Force on XXX Securitization and the Capital Markets–i.e., that the capital markets had changed and could be affecting new business because securitization is currently not available to insurers for financing new XXX reserve transactions.

As all of these pressures come to bear, they drive up the costs of guarantees.

The general feeling is that it is most important for insurers to remain focused on the principles-based approach going forward, in order to reach a long-term solution that will address issues associated with redundant reserves generally.

Although many expect the principles-based approach will provide answers to these issues, this approach isn’t here yet, and its final form and quantitative impact are still unknowns.

It is likely that term insurance will benefit significantly from lower reserves under more reasonable mortality assumptions allowed under the approach. But this may only partially offset the recent constraints in the securitization market.

It is even less clear whether ULSG will benefit meaningfully. Some insurers and products may see large reductions to reserves, while more aggressively priced plans may not benefit at all and may even require increased reserve levels.

Perhaps there is a lesson to be learned from the long term care insurance marketplace. Individual LTC policies have historically been sold on a guaranteed renewable basis, meaning they could not be terminated by the company but rates could be increased. Many of these policies were priced and sold a number of years ago in a higher interest-rate environment and under lapse assumptions that have proven to be too high (note that lower lapses hurt LTC insurance profits, as is generally true for ULSG products).

As a result of these factors and of new regulations that required companies to build additional margins into the pricing of new products, the cost of new LTC policies has increased 25% to 30% from similar plans sold 5 years ago.

Affordability became a real concern as a result and, for various reasons, new individual LTC insurance sales dropped almost 50% from 2001 to 2006. An additional short-lived thrust was made to sell limited-pay LTC plans that in essence provided guaranteed rates within a limited number of years. However, the cost of those limited-pay coverages was even higher.

At least in the LTC market, the conclusion was that the cost of guarantees did not warrant the risk or the incremental premium needed to support long-term guarantees.

Life insurance is not about to revert back to non-guaranteed products, but there are various reasons why some life insurers may take a step in that direction. Meanwhile, those who continue to focus on guaranteed products will need to carefully manage their exposures to various risks across the enterprise, including mortality, interest rates and dependence on third parties who back their guarantees.

Carl A. Friedrich, FSA, MAAA, and Keith Dall, FSA, MAAA, are consulting actuaries with Milliman Inc. in the Chicago and Indianapolis offices respectively. Their e-mail addresses are and