Donna Kinnaird is the president of Swiss Re Life & Health America Inc., and an outspoken voice on term life pricing. She spoke with National Underwriter recently to discuss where term life pricing is, where it’s going and where it needs to be.
There have been some increases in term life pricing, but not quite enough. What is going on? Over a 13 year period of time, until 2008, we’re looking at close to a 30% decrease in term pricing. In 2009, we saw a 5%-6% increase in term prices, and this year, another point increase in term prices. So, maybe a 6-7% increase in term prices. We believe that prices should continue to go up.
Why? When pricing products, individual insurance companies are looking at higher funding costs associated with the letters of credit that they use to fund redundant reserves. Also, investment yields are low and will continue to be low for quite some time. Our economic research and consulting people tell me that in their opinion, there will be market volatility though at least mid-2011. As far as the yields are concerned, they don’t see 5% on a 10-year until probably the end of 2012.
Through the financial crisis, people had to go out and raise capital at higher cost. And because now they have capital on their books that is costing them more than before, they will have higher required returns to meet their numbers.
The industrywide demand for funding right now is probably about $85 billion, and if you look out to 2020, depending on how the rules do or don’t change, the demand could grow to be as much as $136 billion to $150 billion. Everyone is going to be looking for funding to support these reserves.
In spite of logic suggesting otherwise, prices appear to have stabilized, however. We’ve sliced and diced mortality risk down to the point that we believe we can price it more accurately, and that accuracy tends to drive the pricing down in the U.S. moreso than elsewhere. The strength of independent and direct distribution has driven prices down as well.
What kind of scenario do we have to look forward to if prices don’t correct themselves? It’s certainly possible to go for some period of time with one product line less profitable than the other. And I think that’s the kind of situation you’re going to see: the term product line not carrying the same kind of margins that the other products will have to carry or do carry, in order to balance them out to get required returns.
Do you anticipate any regulatory difficulties with trying to increase pricing? It depends on the state, of course, but unless you change your ultimate rates, there are many people who think you don’t need to do any filing. In certain states, there are other primary companies that feel you have to do informational filing. But what we’re really talking about here is changing guaranteed rate and not the ultimate rate, and the way that the states deal with all of this is just not quite as onerous as one would run into with other products.
Any final thoughts? Term prices have to be competitive, they have to be affordable, which I think in the US indeed they are. But they also have to be sustainable. And if the primary industry has priced term products in a way that they are not sustainable for the long haul, then it’s not good for the companies and it’s not good for the consumer.
Interview by Bill Coffin