In the past we have written about limitations on obtaining ledgers to manage inforce life insurance. In one instance the inability to provide in-force ledgers based on “current assumptions” was a precursor to a cost of insurance (COI) increase.
Late last week, a Second Amended Class Action Lawsuit was filed in the United District Court, Southern District of New York in the Brach Family Foundation vs. AXA Equitable Life Insurance Company case we first wrote about on February 2, 2016.
Two lawsuits were filed one day apart last week against AXA Equitable Life Insurance Company for cost of insurance (COI) increases in its AXA Equitable Flexible Premium Universal Life Athena II policies. We “looked under the hood” of the AXA policies affected by these cost increases back in November of 2015. The increases were limited to those policies originally issued to people age 70 and above with a policy face value amount of $1 million or more, which factored into the substance of both lawsuits. There are now at least three lawsuits filed against AXA, including one we wrote about back in February of last year.
A class action lawsuit was filed last week in the Eastern District of Pennsylvania against Lincoln National Life Insurance Company on behalf of the owners of Jefferson Pilot-issued, JP Legend 100, 200, 300 and 400 series life insurance policies. Lincoln National purchased Jefferson Pilot in March of 2006.
Less than two weeks ago, we reported that Moody’s had downgraded its 2017 outlook for the life insurance sector from Stable to Negative. A new Moody’s report published after the Federal Reserve raised its benchmark federal funds target rate by 25 basis points last week indicates that hike will benefit life insurers and “help reverse the downward march in investment portfolio yields.” (1)
Yesterday, the New York State Department of Financial Services proposed a new regulation designed to “protect New Yorkers from unjustified life insurance premium increases.”
On November 8th, a United States District Court judge in California’s Central District ruled that a consolidated class-action lawsuit against Transamerica could move forward. The lawsuit’s main allegation concerned Transamerica’s “breach of faith” for the cost of insurance (COI) increase in their Universal Life policies.
We reported back in September of 2015 that Transamerica increased costs in several of its Universal Life insurance policies (see: Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees). Earlier this year we discovered another Transamerica cost increase while working on a policy review, which we subsequently covered in Transamerica Cost of Insurance Increases: Is the Other Shoe Now Dropping? That increase was dramatically higher than the first one. Transamerica acknowledged this new increase shortly after we discovered it.
The Transamerica cost increase dramatically raised the carrying costs of life insurance policies and several class-action lawsuits were filed against the carrier. Three of those lawsuits were combined: one filed in California by Consumer Watchdog (see: Consumer Group Files Suit Against Transamerica for Cost of Insurance Increases); a second California lawsuit, Thompson v. Transamerica Life Insurance Company (see: Another Class Action Lawsuit Filed Against Transamerica for Cost Increases); and one originally filed in the Southern District of Florida (see: Preliminary Injunction Motion Filed in South Florida Against Transamerica to Stop Cost of Insurance Increases). In a June 10, 2016, Consolidated Class Action Complaint filed in the Central District of California, the plaintiffs asserted “seven claims against Transamerica on behalf of themselves and all others similarly situated”. On August 1, 2016, Transamerica filed a motion to dismiss the complaint.
In the complaint filed, the plaintiffs argued that Transamerica was not allowed to set monthly deductions (which included the COI) “in whatever amount or by whatever method it determines.” The plaintiffs also argued that the standardized policy language requires that Transamerica can only change deductions based on underlying mortality rates and that Transamerica was not allowed to “set or increase [monthly deduction rates] to recoup past losses” because of low interest rates or other factors. They further argued that the deduction increase of “as much as 100%” caused “an astronomical increase in the premiums necessary to maintain coverage under the policies” which was designed to induce “shock lapses.”
On October 31, 2016, the court heard oral arguments. On November 8th, the Honorable Cristina A. Snyder ruled against Transamerica; their motion to dismiss the plaintiffs' claims was denied.
For a copy of the Civil Minutes in the case, please email firstname.lastname@example.org.
Over the last two years, we have written extensively about the impact of the low interest rate environment on life insurance policy performance, primarily Current Assumption Universal Life policies. Many carriers have pointed to low interest rates as a primary cause for their cost of insurance (COI) increases in these policies. Anyone who has attended one of our webinars on life insurance policy subjects (see: https://www.itm21st.com/Education) knows that we describe Universal Life as a living Excel sheet—you can see each expense and credit in the policy if you know where to look.
The cost of insurance (COI) increases of the last 18 months have wrecked estate plans and created financial hardship among policy owners. The negative effect is clear – some policy carrying costs have more than doubled (see:Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees). What is not so clear – who is to blame?
Lincoln Financial Group is the latest carrier to announce cost of insurance (COI) increases. In correspondence to producers today, Lincoln announced COI changes in some Legend Series Universal Life policies issued between 1999 and 2007. The majority of the changes are increases, but also included some decreases, “reflecting Lincoln’s commitment to acting fairly and responsibly.” This block of Universal Life policies was originally underwritten by Jefferson Pilot (Lincoln Financial purchased Jefferson Pilot in 2006.) In making the announcement, Lincoln noted that it is “operating in a challenging and changing environment” and faces “persistently low interest rates, including recent historic lows, volatile markets, and an evolving regulatory landscape.”
Back in May of this year we reported that Lincoln Financial, acting as administrative agent and reinsurer, raised COI rates on a specific block of universal life and variable universal life policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company.) (See: Another Major Carrier Raising Cost of Insurance Charges)
Lincoln’s announcement today is the latest in a series of COI increases that started just over a year ago and includes some of the largest, most prominent carriers in the life insurance market; including Transamerica, Voya, Legal & General, and AXA. The cost increases across these carriers ranged from low single digits to as much as 600 percent. The increases have dramatically and negatively affected thousands of policies, causing many policy holders to reduce policy death benefits or surrender policies for a fraction of the expected benefit.
Lincoln Financial, like the others it follows, has placed at least a portion of the blame on interest rates. Unfortunately, it does not appear that the historically low interest rate environment is nearing an end. As we mentioned in one of our last blog entries (see: Low Interest Rate Winners and Losers), over 35 percent of all government debt among major countries is trading at negative interest rates. In fact, in Switzerland, government bonds with a maturity of almost a half century are yielding below zero. (1).
And in the US, the Federal Reserve, which has held the federal-funds rate at 50 basis points or less since the end of 2008, is now realizing that we may have a “new normal.” A Wall Street Journal article yesterday noted that the “Fed has revised down its estimates of how high the fed-funds rate will go in the long run. Most officials see it reaching 3% or less. Four years ago the consensus was 4% or more.” While the Fed is expected to boost the federal-funds rate by perhaps a quarter percentage point this year, the article goes on to state that “it isn’t likely to raise them much beyond its next few moves in the months and years ahead.” (2)
The outlook for the next couple of years might just be more of the same, low interest rates and COI increases. We at ITM TwentyFirst will keep you updated on Lincoln’s announcement as we receive more details related to the policies we manage.
Central Bank Buying Puts Squeeze on Bond Market, Wall Street Journal, July 7, 2016.
Federal Officials Brace for (Familiar) New Normal, Wall Street Journal, August 21, 2016