BROOKLYN, N.Y.–The capital market freeze could force life insurers to revamp their product lines, speakers said here at a conference organized by Standard & Poor’s, New York.
Sellers of products such as term life and universal life may have to cope with a drop in the flow of cheap capital by increasing rates, Kevin Ahern, an S&P senior director, said during one panel.
Several speakers talked during another panel about the need to revise variable annuity benefits guarantees.
At VA operations, “People just got comfortable with the stock continuing to go up,” said Dennis Glass, president of Lincoln National Corp., Radnor, Pa.
Donald Guloien, president of Manulife Financial Corp., Toronto, recalled that VA issuers started by offering customers guarantees that they would get at least 75% of their principal back, then moved up to guaranteeing 100% principal. Later, they started including “ratchets,” “step-ups” and other features that guaranteed more than 100% of principal.
“We have to offer the consumer a good value that doesn’t expose the insurance company to extreme risk,” Guloien said.
“Frankly, the prices are going to have to go up,” said Edward Zore, chairman of Northwestern Mutual Life Insurance Company, Milwaukee. “There are going to higher margins, and some of the whistles and bells are going to disappear.”
Zore and Guloien sparred over the role of distribution channels in controlling product-related risk.
At Northwestern, a company with its own career agents, producers “have an obligation to sell what we deliver,” Zore said. At a company that sells through brokers, “you’re going to be competing with the lowest common denominator.”
But at Manulife, which sells through both brokers and career agents, careful oversight helps prevent either channel from letting producers sell unprofitable business, Guloien said.
Glass noted that, overall, problems with investments are causing much more serious problems than are VA guarantees or other products.
Gregory Gaskel, an S&P director and moderator of the panel that featured the top life company executives, asked Zore about the performance of the “enterprise risk assessment” approach to managing investment risk and other types of risk.
“Obviously,” Zore replied, “it failed the financial industry, because we have a big financial mess.”
One problem is that many risk modelers stuck to using data and assumptions based on the bull market years of the 1990s and 2000s. They failed to consider the effects of “tail risk,” or the possibility that the unusual circumstances at the far right and far left of probability curves might come true, Zore said.