Our firm manages life insurance for TOLI trustees and institutional investors, and I have heard a concern from both parties about the recent Current Assumption Universal Life (CAUL) cost increases. People are worried about the direction of in force policy pricing. Are the increases an aberration or will they spread? I am not a soothsayer, nor am I on the boards of any of the carriers that have increased costs or are contemplating a raise, but I do have some insight into the matter because of our role in the policy management industry.
Any discussion about this issue begins with interest rates. I began mentioning this ten years ago in talks I delivered in my prior life in the life insurance/brokerage world. Back then I began using this chart that shows the crediting rate for a major UL carrier – and the rate has not gotten any better, rather, it has gotten worse.
Two ways carriers make money is on cost of insurance and interest rate spread, the difference between what they earn and what they credit to the policy. A CAUL product has a current rate being paid and a guaranteed rate, below which the current crediting rate cannot fall. A quick review of our portfolio of CAUL policies shows that for those policies issued between 1980 and 2005, 60 percent have dropped to the guaranteed rate. If we break out only those policies issued between 1980 and 1995, the percentage jumps to a whopping 78%, with another 12% of the policies within 100 basis points of the guaranteed rate. The average guaranteed rate on the policies we manage issued between 1980 and 1995 is just under 4.3%, so where is the spread if a carrier cannot lower the crediting rate any further in this low interest rate environment? If they cannot make money on the interest rate spread, where can they make it? On the cost of insurance.
For example, on the Transamerica policy I referenced in our last blog post (Transamerica Cost Increase Causes Premium to Maturity to Jump Over 200%: A Case Study for TOLI Trustees,), the current rate being credited had dropped to the effective guaranteed rate which – according to the latest VitalSigns report – was 26 basis points above their five-year average total rate-of-return, no profit here. So…they raised the monthly deduction by 40% on that policy, more than doubling the level premium to maturity. Maybe I am taking a simplistic approach, but it seems logical.
And interest rates may not be the only issue. “Experience factors,” which include not only the interest rates but also mortality, persistency, and expenses, were cited in the carrier letters we received. Voya and AXA raised costs on some policies they had purchased. Perhaps the blocks purchased were not underwritten well, or maybe during the transition, they experienced adverse selection as healthy insureds fled fearing the carrier change? Will this be an issue going forward on business that has been purchased? Perhaps. I had more than one advisor tell me they would suggest that clients switch coverage, if they could, when Allstate sold Lincoln Benefit Life Company to Resolution Life Holdings, Inc., a “runoff” company. (Another Life Insurance Carrier is Sold: Why This Sale May Be Bad News for You and Your Clients.)
Legal & General America is raising rates on some of its Banner policies. Banner is known primarily as a term carrier. Often the best deal when moving from term to permanent is not with the term carrier you are with, unless a health change has occurred and that carrier is obligated to provide a conversion policy based on your prior healthier condition. Perhaps term conversion polices bring their own adverse selection issues?
With the inaction of the Fed to raise rates recently, we may well continue in this historically low interest rate environment for some time. Will this, along with the other issues mentioned, cause more pricing issues? If things don’t get better, they tend to get worse.
NOTE: This Blog was originally posted on September 29th. Since then AXA has raised COI rates on a limited number of policies issued in the last decade.