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.