Historically, the economy has had little impact on individual life insurance sales. Good or bad, individual life insurance sales have fared pretty evenly.
Not so this time around.
First, a look back. From 1976 to 2007, total annualized new premium grew on average 4.6% per year. During that period, while the United States experienced four recessions, individual life insurance products emerged relatively unscathed as different products thrived and sustained over sales when other products faltered.
With the recession of 2008-2009, however, things are different. Over the past four quarters, individual life insurance new premium has experienced double-digit declines.
New premium declined 14% in the fourth quarter of 2008 compared to the prior year quarter, the steepest quarterly decline since 1951. And that was just the beginning. First quarter 2009 set new records for declines. Annualized new premium dropped 26%, the biggest quarterly decline since 1943, during World War II. In the second quarter 2009, new premium dropped 20%-giving some hope that the worst might be behind the industry.
The declines did not involve just one or two companies. They were across the board. About 65% of participants in LIMRA’s quarterly Individual Life Sales Survey reported declines, most by double digits.
Over the past decade, universal life insurance has been the dominant product. In 2007, UL experienced record sales and had 42% market share. Yet, in the fourth quarter of 2008, UL sales dropped almost 25%; and in the first half of 2009, sales declined almost 30%.
Variable life products reached their peak of 36% of new premium in 2000. The recession in 2001 resulted in plummeting sales between 2001 and 2003. VL products never recovered from that economic downturn in 2001. Over the past five years, VL has held around 15% market share but the current recession has prompted even further declines for variable products. In the first six months of 2009, variable products posted abysmal sales, down 55% as compared to the first six months of 2008.
Yet despite all the bad news, there are signs that consumers have not completely abandoned life insurance.
Term and whole life insurance remain relatively intact in 2008. Term was only down 1% and whole life, after experiencing a 7% jump in the third quarter followed by a 2% increase in the fourth quarter, was the only product to grow in 2008, ending the year up 2%.
In 2009, term and whole life continued to perform much better than their UL counterparts, declining by single digits in the first and second quarters. In addition, term and whole life each accounted for 28% of new premium in the first and second quarters, the highest share for whole life since 1999 and a record for term.
The simplicity of both products, as well as the affordability of term, is likely helping them sell right now.
Knowing all of this, what is to learn from this recession?
History has shown that different products do well in different environments. Companies that maintain a diverse, comprehensive product portfolio will be better positioned to weather economic changes that inevitability occur.
During the current recession, mutual companies, which traditionally sell the majority of whole life products, were less affected than their public counterparts. In part, this was due to the stock market turmoil and fears about public companies’ solvency. But the mutual companies also had the products and marketing in place to capture the growing demand for whole life insurance.
In addition to different products performing well, some markets are performing better than others. Companies and producers have focused increasingly on older, more affluent customers. However, sales are declining in the “hot” over-65 UL market. This demographic accounts for only a small number of the policies sold each year, but a significant amount of UL premium.
Since different products perform better at different times, it is important to avoid chasing the “hot” product of the day and investing in product development before the economy changes its course.
Finally, some demographic groups are impacted more by an economic downturn than others. This makes a diverse target market an important factor in weathering financial storms.
Elaine Tumicki is vice president-product research, and Karen Terry is manager-product research at LIMRA International, Windsor, Conn. Their respective e-mail addresses are: [email protected] and [email protected]