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Swiss Re: Term Life Rates Must Rise

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Tough U.S. reserving rules and the effects of the financial crisis already are forcing insurers to increase term life prices, a reinsurer says.

Kurt Karl and David Laster, analysts in the New York office of Swiss Reinsurance Company, write in a report that term insurance prices have started to rise this year after falling sharply for 15 years.

“While many direct writers have held the line on premiums this year, some leading companies have raised term insurance premiums by as much as 10% to 15%,” Karl and Laster write. “Some have stopped writing long-term business, such as 30-year level term.”

One reason is that, in the United States, the “Triple X” reserve requirements that took effect in 2000 appear to require life insurers to hold reserves for term life business that are about twice as big as insurers think they really ought to be, the analysts write.

Meanwhile, because of the current capital market turmoil, tools such as reinsurance, insurance-linked securities and letters of credit are either more expensive than they used to be or unavailable, and the crisis also has reduced insurers’ own capital and surplus by about 14%, the analysts write.

Reinsurers and bank issuers of letters of credit are having a hard time helping life insurers overcome that capital depletion, because they, too, have suffered from capital depletion, and insurers’ investment yields have dropped from about 8% in 1991 to less than 6% in 2008, the analysts write.

Life insurers could respond by tightening underwriting requirements, and by avoiding products that offer long-term guarantees, the analysts write.

Another solution is to work toward adoption of a principles-based approach to reserving, so that life insurers are making the most effective possible use of the capital that they do have, the analysts write.