By George Hrischenko, Marketing Actuary Leader

Transcription

1 On August 9, 2011, SCOR SE, a global reinsurer with offices in more than 31 countries, acquired substantially all of the life reinsurance business, operations and staff of Transamerica Reinsurance, the life reinsurance division of the AEGON companies. The business of Transamerica Reinsurance will now be conducted through the SCOR Global Life companies, and Transamerica Reinsurance is no longer affiliated with the AEGON companies. While articles, treaties and some historic materials may continue to bear the name Transamerica, AEGON is no longer producing new reinsurance business. When discussing term trends, we often focus on pricing and movement among the top market players. While the past 18 months have been relatively quiet, that should not be construed as uninteresting. Carriers have been quite active on the product design front. The ranking of the top 20 term carriers has remained largely the same. Overall, carriers showed greater focus on developing products to reflect the economic circumstances creating value without consuming additional scarce capital. Three products reflect this activity well: the emergence of term-on-a-universal life chassis, the tenacity of return-of-premium (ROP) term after Actuarial Guideline 45 took effect, and the re-emergence of income protection term. By George Hrischenko, Marketing Actuary Leader Term-on-a-UL Chassis One development in late 2009 involved the manufacturing of a universal life (UL) product that mimics the key features of level-premium term. It is available with 10-, 20- and 30-year level premiums. It is designed to carry no cash value. In other words, at least over the level premium duration, it behaves like a pure mortality product. Because the product uses guarantees, no illustration is required like traditional UL (though it does require an annual report). But like UL with secondary guarantees (ULSG), the product can be designed to carry cash value, and uses multiple shadow accounts to keep the policy inforce even if the cash value account is negative. Similar to other ULSG policies it is AXXX compliant.

2 Figure 1: Traditional Term Versus Term/UL Rates (Illustrative Only). On 20-year traditional term, rates increase annually after the level term period. On term/ul there is a much larger initial step to a permanent guaranteed rate. As with a level-premium term policy of the same duration, the term-on-a-ul chassis maintains level premiums for a stipulated period. Following the end-of-level-period, both products reset rates. However, in contrast to the traditional term policy s YRT pricing, the term-on-a-ul-chassis product provides for guaranteed level (though higher) premiums following the traditional end-of-level-premium period. Carriers that have introduced the term-on-a-ul-chassis product have been able to price their products competitively within the price-sensitive term market. Depending on age, class and gender, the term-ona-ul-chassis product can be among the lowest priced alternatives to clients (Figure 2). Its lack of conversion need due to its end-of-initial-level-period level premiums, its permanent coverage and the optionality to build cash value make the term-on-a-ul-chassis product a threat not only to traditional term life but also to other cash value policies. Company Annual Premium A 2,200 B 2,300 C 2,304 D 2,340 E 2,345 F 2,348

3 G 2,370 H 2,375 I 2,415 Figure 2: Pricing Comparison: Male, 45, Standard Non-Smoker, 20-Year Level Premium, $1 Million Face Premiums as of 10/2009 for the top 20-year term products. Company B s product is the term-on-a-ul chassis, which positions the company very competitively in a tight margin market. However, the product design is complex. The saying, With flexibility comes complexity, generally holds for the products currently offered and is reflected in policy charges that are slightly higher than those for traditional term policies. In other words, there is a cost. As of this writing, the term-on-a-ul chassis has been introduced by three major companies (through five affiliates), but expect to see more companies rolling out similar products in the near future. Forms for these policies have been filed and accepted successfully in most states, including New York and California. Reports of ROPs Demise Were Premature Actuarial Guideline 45 (formerly known as Regulation CCC) became effective at the beginning of AG45 accelerated the premium return schedule and per annum portion with several important pricing implications. It was commonly expected that companies would respond by either withdrawing their products or repricing them at a level that made them uncompetitive compared to other risk management and investment options. While a few companies did withdraw from the market, most repriced their ROP products. The results were not surprising: first quarter sales of ROP products declined over the same period in 2009, though by under 10 percent. Policy count, however, fell by more than 20 percent. Average face amount dropped slightly, from $331,000 to $314,000. Premium volume for the top five ROP writers increased overall in first quarter 2010, compared to the same quarter in The primary drivers for this appear to be significant sales growth by the top carrier, nearly tripling ROP business sold a year ago. The fourth largest seller was the only other company to register sales growth among the top five. Sales among these companies more than masked fairly substantial drops in the other three companies. (Source: LIMRA International) Company January 2009 January 2010 Change A $240 $ % B $355 $ % C $250 $ %

4 Average $ $ % Figure 3: Select ROP Premium Rate Changes The premium rates for the three companies above are for male, age 45, best non-smoker 20-year ROP term, $500,000 face. There appears to be little agreement on the fair rate for these products, either in 2009 or These companies represent the small group of firms that offered products both before and after the implementation of AG45. As of second quarter 2010, some carriers determined they were too conservative in their initial repricing and have begun to reduce rates. However, these new rates are still higher than pre-ag45 premiums. The sweet spot for ROP term appears to have been in the $250,000-$500,000 face amount range. Most companies have had difficulty selling higher face amount ROP products for two reasons. First, the higher premiums made such sales more difficult. Second, producers were likely to encounter the same resistance they do with high face amount perm policies there s always the option to buy (pure) term and invest the difference. Instead, ROP seems to be finding a new market niche. The feature is appearing increasingly on policies with smaller face amounts, at times within the simplified issue range. For example, late last year one major carrier introduced a simplified issue ROP term policy with face amounts starting at $100,000. Mortgage ROP, which ties face amount to outstanding mortgage principal, is typically marketed on a simplified-issue basis. This product has logical appeal for both consumers and carriers. For individuals seeking basic insurance coverage, a simple transaction-oriented process combined with a perceived savings element is appealing, especially under current economic conditions. This attraction has spurred increased interest in companies lowering their minimum face amounts to capture more business in a fairly stagnant market environment. Income Protection The Return of an Old Standby? Interest also appears to to be increasing with a product that has seen little sales activity over the past decade. Since early 2009, a number of companies have introduced new income protection term life policies. Income protection term life exhibits several key differences from traditional term life. Its term is usually stipulated as an attained age, not a specific 5-year increment. Additionally, it is structured from the outset to pay periodic benefits for a fixed horizon (in many cases an attained age) instead of a lump sum, very similar to an annuity. As such, income protection term is effectively a decreasing death benefit policy total benefits paid are higher for policies that experience deaths earlier in the term, all other factors held constant. However, several variants on the typical income protection product exist including, for example, differing premium and benefits schedules. Feature Traditional Term Income Protection Term Term Stated duration (e.g., 10, 15, 20, 30 years) To attained age (e.g., 62, 65, 67, 70 years) Face Amount Level death benefit Decreasing death benefit Pricing Level premium Level premium Death Benefit Lump sum Other settlement options available (annuities, draw downs, etc.) Effectively a DB annuity Stated periodic benefit Total benefits the greater of a minimum

5 Retained accounts have taken a hit in press guaranteed benefit and standard benefit schedule Duration of benefits may be based on difference between insured s age at death and policy attained age Usually include some cost-of-living adjustment Lump sum cash out available Cash Value Maturity Value Figure 4: Traditional Term vs. Income Protection Term The typical income protection term product has several notable differences from a traditional term policy. It is a decreasing death benefit policy, and its term can be linked to the insured s age, not a fixed time period. In light of the financial crisis, some carriers believe that consumers will find a product appealing if it helps beneficiaries meet time-specific obligations making mortgage payments, providing income until retirement benefits are triggered, etc. Income protection is designed with these goals in mind, and should be priced at a more affordable level than a traditional term policy of the same duration. In 2009, the modest one percent decline in term life sales helped cushion the decline in overall life insurance growth. However, the latest sales figures for term life (second quarter) show some of the largest declines ever recorded on a premium basis. Some of this could be attributed to the term-on-a-ul chassis product. No doubt we ll see UL sales increase at the expense of term sales if these products become popular even if the purchasing intent (mortality protection) is the same. Still, the efforts in product development mentioned above represent carriers industrious attempts to respond to consumer needs in unprecedented times. Their popularity, though, remains to be seen.