Business as usual may have felt anything but normal in 2009.

Life insurance sales have been down overall in 2009, according to LIMRA, Windsor, Conn. That is not surprising given that consumers generally felt less wealthy in the economic downturn.

Market share has been changing too, with variable life nearing a 20-year low, whole life at a 10-year high and term life approaching record territory. Universal life hung in there with an increased number of policies but reduced premium volume. Equity markets made variable life products, which never recovered from the tech bust in the early 2000s, even less popular.

Interest rates were low, and company portfolio returns trended lower as well, with credit spreads slimming down considerably since the end of 2007.

Participating whole life insurers took notice, with several large carriers cutting dividend scales in the last 12 months. Carriers with interest-sensitive life products have seen larger percentages of business veer toward contractually guaranteed interest rates, reducing spread income on applicable business.

At the same time, capital management at insurers was under intense scrutiny. While this led some annuity carriers to limit sales in the last 12 months, certain life products were also affected, with a few companies removing 30-year level term and return-of-premium term products. Additionally, selective term and UL with secondary guarantee rate increases across the industry may be partially capital-driven.

Meanwhile, the ability to tap the capital markets for surplus relief is only now beginning to reappear after the credit crunch. That means life insurers can once again have discussions about putting these solutions in place. The costs have increased, but the carriers are relieved to have a market at all.

Even though some insurers pulled products off the market, product development went on at many others, albeit with a focus on capital constraint.

At the same time, United States carriers with a global parent increasingly find themselves needing to price products on a market-consistent basis. Anecdotally, some of these insurers are finding it hard to compete with U.S.-based carriers developing products by looking only at real-world results.

Product development was also affected on the regulatory front. Actuarial Guideline 45, which applies to minimum non-forfeiture for return of premium term products, will be effective January 1, 2010 but new product filings must already comply. At the same time, principles-based reserves continued a march toward applicability in the U.S. market.

What opportunities does this backdrop create for the life insurance in 2010? The focus on guarantees, which started after the tech bubble burst in the early 2000s, seems destined to continue.

Also, protection products (term, UL with secondary guarantees and other low-cost ULs) seem poised to continue strong performance. Some insurers are increasing flexibility with “dial-a-term” policies.

The marketing opportunity for par WL companies to tout guarantees and stability appears to bode well for carriers with competitive products in this arena.

Indexed life products, while still a small part of the overall life insurance market, are likely to continue on a solid growth path.

Additionally, with consumers feeling pinched in the wallet, the time is ripe for a variety of products that fill multiple needs at once. Combination life with long term care products fit this bill, and life insurer activity has been picking up on this front.

In this vein, it would seem to make sense for life insurance and retirement planning to be coupled together in a “there if you need it, there if you don’t” framework.

Life insurers are more focused than ever on measuring risks in their portfolios (both asset and liability). On the liability side, product guarantees are seeing increased focus on stress- and scenario-testing to gauge company risk.

Also, prospective methods of calculating policy reserves and capital are centered on running numerous scenarios, setting reserve and capital levels based on outcomes of the least favorable situations.

Product monitoring will also get increased attention. Carriers are reviewing product profitability and emergence of actual earnings compared to those projected in pricing. This process allows insurers to emphasize products that add value to the enterprise and to eliminate those that do not.

In sum, the market will need and want guarantees and stability more than ever, while the economic environment, regulatory considerations, and risk management will impose constraints. But it is situations like this that often breed the “Eureka!” moments leading to innovation.

Robert P. Stone, FSA, MAAA, is an actuary and consultant with Milliman, Inc. in the Indianapolis office. His e-mail address is rob.stone@milliman.com.