Genworth Joins the List of Carriers Restricting In Force Ledgers

Since the beginning of the year, we have written about two carriers restricting their in force ledgers.  John Hancock recently noted a “temporary” situation on its Performance UL policies issued in certain states from 2003 to 2010, and alerted us that current assumption illustrations were unavailable for those policies.  Current assumption illustrations are those based on the current interest being credited and the current cost of insurance (COI) being charged on a policy.  In March of this year, Transamerica alerted us that they would “only run illustrations based on the guaranteed maximum charges and the guaranteed minimum interest rate” on a block of in force policies.  We noted that this was the second time that Transamerica placed restrictions on a block of policies.  The prior restriction was a precursor to a cost of insurance increase. 

Last week, our servicing team in Iowa received notice from Genworth that they would be unable to provide current assumption illustrations on a policy we manage.  They noted “existing illustration regulations” which limited them to only providing illustration projections “based on contractually guaranteed interest and cost of insurance, i.e., the lowest interest and highest cost of insurance rates allowed by your policy.”

We caution reading too much into this Genworth notice as the restriction appears to be limited and no COI increase has been announced.  We will, however, be tracking all the referenced policies for any changes in their cost structure.

Principle Based Reserving May Affect New Life Insurance Policy Pricing Going Forward

A new methodology for calculating policy reserves for life insurance policies has taken effect. The new methodology grew out of the 2009 National Association of Insurance Commissioners (NAIC) revisions to the Model Standard Valuation Law. Dubbed Principle-Based Reserving (PBR), the law was to take effect on the first day of the next calendar year if 42 states enacted the revisions by July 1st. The threshold was passed in 2016 and as of today, 46 states have adopted the revised laws.

Insurance companies are required to set aside reserves to pay future claims, and the reserve requirements are specified by state regulation and laws. The current method of reserving will remain unchanged for in force business, as PBR only affects policies issued on or after January 1, 2017. However, life insurers will have three years to implement the new methodology. Currently, the requirements will be altered for life insurance policies only, but over time they are expected to apply to other products as well.

According to information provided by the NAIC (1), the new approach will lessen the need for changes to regulations and laws as new products are introduced. Under the new methodology, states would “establish principles upon which reserves are to be based rather than specific formulas.” Under the current formula, the risks, liabilities and obligations are not always correctly “reflected,” and “for some products this leads to excessive conservatism in reserve calculations, for others it results in inadequate reserves.” A study by the NAIC disclosed the new method will lower reserves for competitive level premium term insurance. Universal life policies with secondary guarantees will see both “higher and lower reserve requirements,” which was not unexpected, “given the variations in company interpretations of the reserve requirements for this product type that were in effect when this study was done.” Per the study, reserves for most other products, including current assumption universal life and whole life, will remain relatively unchanged.

Reserve requirements are only one of the many factors affecting the pricing of life insurance. Others factors include mortality expenses and investment returns, along with overhead expenses, other than reserving.

While it remains to be seen exactly how pricing will be affected, the NAIC believes the “right sizing” of reserves will benefit consumers since holding higher reserves tends to increase costs, and holding reserves that are too low puts the consumer at risk. The new regulations will also allow for the introduction of new products that could offer multi-benefits and more flexibility for consumers.

For those of us managing in force life insurance, the new methodology will change little, though new and replacement products going forward may be more or less attractive because of pricing changes.

1.) PBR Educational Brief, June 21,2013, The National Association of Insurance Commissioners, and The Center for Insurance Policy and Research

The Prince Estate Sells His Music Vault, How Will That Affect His Legacy?

In 2004, Prince took part in a ceremony honoring George Harrison at the Rock and Roll Hall of Fame.  Sharing the stage with such rock luminaries as Steve Winwood, Tom Petty, and Jeff Lynne, Prince joined the group in a rendition of “While My Guitar Gently Weeps” by providing firepower on the song’s guitar solo, and he did not disappoint.  About halfway through the six minute and fifteen second YouTube video, Dhani Harrison, George’s son, smiles at Prince, knowing what is to come. Prince then launches into a three-minute performance in which he doesn’t just play notes, but makes the guitar an extension of his body.  Great guitarists make it look easy – it just flows, and that night it did for Prince.  By the time the last note rang out, with Prince tossing his vintage Fender Telecaster into the audience, the members understood what a singular talent he was.

Most people don’t think of Prince as a great guitarist, they remember him for his songs, and not just the songs he made famous like “Little Red Corvette,” “Purple Rain,” and “1999,” but also the songs he wrote for others.  “Nothing Compares 2 U” made Sinead O’Connor a star – briefly.  He gave the Bangles arguably their biggest hit with “Just Another Manic Monday,” a tune he wrote under the pseudonym of Christopher.

Prince did not have a home studio, he had a 60,000-square foot entertainment complex as his home –  he literally lived in the studio.  He put out 39 albums and contributed to many more recordings during his lifetime, but the vault he left behind included even more than that. He battled throughout his career to manage the creation and the delivery of his music on his terms – passing up millions to ensure that he alone controlled his art.

He was a prolific songwriter and like anyone prolific in his or her craft, among the many gems there will be clunkers. Which is why it was upsetting to read that his estate had signed a $30M deal giving Universal Music Group access to the vault.

Many articles have been written about the estate planning mistakes Prince made as he did little right in that area.  His money, estimated at more than $150 million (2), may not have gone to the right people or causes, but I imagine it is the possible tarnishing of his music that would be most disturbing to him.  I suspect we will soon hear songs Prince never intended to see the light of day – at least not without his special polish.

In the end, that is his estate planning failure – someone who spent his life attempting to control the most important thing in his life, his music, lost control in death.

Estate planning focuses on lowering taxes and maximizing assets for the next generation, but for many the most important asset left behind is legacy.   Let’s hope his lives on as he would have wanted.

  1. Auctions for Prince’s Music Leaves Some Bidders Feeling Left Out, WSJ, March 27, 2017
  2. Bankrate.com

Two More Lawsuits Filed Against AXA For Cost of Insurance Increases

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.

The first suit, filed January 18 in Arizona (Wenokur v AXA Equitable), accuses AXA of “improperly targeting a subset of policyholders who exercise their contractual rights to keep their accumulated policy account values as low as possible and pay flexible premiums.” According to the suit, the “exorbitant” cost increases were designed to force policyholders to “take one of two unsavory courses of action”; either pay increased premiums that the carrier “knows would no longer justify the ultimate death benefits” or surrender or lapse their policies.

Though AXA stated the increase was “warranted” because “affected insureds are dying sooner than AXA anticipated,” the suit points out that in a regulatory filing in February of 2015, the carrier answered no to the question asking whether its “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience,” and also pointed out that “mortality trends for the affected insureds have improved substantially since the time the policies issued.”

The lawsuit states that AXA “violated the terms of the policies” by “targeting only a subset of a risk class” and by basing the increase on unreasonable assumptions, breached the contract. Though AXA based the increase at least partly on expectations of “investment experience” in the future, the suit points out that investment experience is not a listed factor that may be considered for increasing COI rates, though “investment income” is, but “even if AXA’s investment income has changed, this factor cannot justify inflicting a COI increase solely on the subset of AUL II policies upon which AXA has sought to impose the COI increase (those with higher issue-ages and face-amounts).”

The second suit (Hobish v AXA Equitable), filed the next day in the Supreme Court of the State of New York, accuses AXA of “breach of the terms of the policy, deceptive business practices, and excessive, unconscionable and unlawful premium increase.”

The insured was issued the policy at a standard nonsmoker rating class. According to the suit, the policy contract stated that any changes to interest rates, charges, or other deductions would be on a “basis that is equitable to all policyholders of a given class.” When contacted by the insured, the carrier stated the cost increase would apply only to a class of insureds “with issue age of 70 and above and with a face amount of $1 million and above.” According to the lawsuit, nowhere was that class identified. The only policy class that was identified was the insured’s rating class of standard non-smoker. “Nothing in the policy permits AXA to imposed a COI increase based on the issue age or face value of the policy,” according to the suit.

The lawsuit also accuses AXA of deceptive business practices in violation of New York business law since they targeted consumers aged 70 and “misled” these consumers “into believing they would not be targeted for premium increases” that were “not applied generally and equitable to all members of a designated class.”

The suit cites the “predatory increase” in the cost of the policy as a “flagrant tactic to increase revenues and to drive aging individuals out of their policies.” In this case, the plaintiffs surrendered the policy on the insured, then age 92, “under protest” four months after the cost increase took effect. They received $412,274 as surrender value for the $2 million policy, after funding the policy with a total of $913,804 in premium payments.

For copies of both of these lawsuits, email mbrohawn@itm21st.com

Ratings Agency Downgrades Outlook For Life Insurance Sector, But Others See Positive Opportunities For The Future

A report just out from Moody’s on the global life insurance market has downgraded the sector for 2017 from Stable to Negative. (1) The historically low interest rate environment is cited as a main reason. Moody’s acknowledges the “post-U.S. election bump in yields” we have seen after Donald Trump’s victory, but still believes the low rates will continue “to depress the sector’s investment returns and profitability.” While interest rates may be pushing slightly higher, rates credited to policies take a longer time to turn around, a fact we acknowledged over two years ago (see: Turning the Battleship Around…An Update.) For Moody’s, the low rates are “the main driver for the outlook change to negative.”

Another consideration was the increased market volatility that could occur because of higher worldwide political risks and uncertainty in 2017. This could negatively affect carriers’ earnings and drive risk-averse clients to products containing higher guarantees, which demand larger and costlier reserves. Increased regulation and higher reserve requirements were other factors affecting the rating downgrade.

The low interest rate environment also drives carriers to chase higher returns in illiquid and alternative investments, as well as equities. While these asset classes may bring higher returns, they pose more risk than the fixed investments that make up the bulk of a carrier’s portfolio.

The United States, Japan, the United Kingdom, Germany and the Netherlands were among the specific countries Moody’s cited as earning a Negative grade.

In another report out this year, EY believes “stagnant growth and lingering low interest rates” mean the life insurance sector “faces a challenging future,” but points out some areas of change that might positively affect the industry. (2) These include “new thinking and cultural shifts,” especially in the area of innovation. The industry as a whole has been slow to modernize, and developers in other areas are beginning to creep into the life insurance space. These “disruptors” are providing applications and systems designed to improve the customer experience, while streamlining the life insurance process. Data-driven companies entering or in the marketplace, including ITM TwentyFirst, will change the way life insurance is underwritten, sold, and monitored. The report points out the “perception problem” of an industry with difficult to understand products that many believe are out of touch with today’s consumers and cites the need for “engaging and educating customers with media…that customers are comfortable with.” By adapting to the changing world, EY sees tremendous opportunity for innovative companies in the space.

The ITM TwentyFirst team of independent life insurance professionals helps to empower policy owners to make informed decisions and realize the full value of life insurance assets. We appreciate the opportunity to be a part of the state-of-the-art changes taking place in the evolution of life insurance and life insurance policy management.

  1. “Life Insurance – Global: 2017 Outlook – Low Interest Rates, Risk of High Volatility and Legislative Changes Turn Outlook to Negative,” Moody’s Investors Service, December 5, 2016
  2. “2016 Life Insurance and Annuity Executive Survey,” EY, 2016

Dividends at The BIG 4 Carriers Mostly Down, But Are Interest Rates Finally Going Up?

A couple of weeks ago, we reported that Northwestern Mutual had declared its 2017 dividend and had not only lowered it but also increased some costs (see: Northwestern Mutual Dividend and Crediting Rates Drop, Expenses Rise). Northwestern Mutual was the first of the so-called “Big 4” mutual carriers to report. These A++ (AM Best)–rated companies are considered to be the gold standard among life insurance carriers. The others in the group (New York Life, Massachusetts Mutual, and Guardian Life) have now all reported in, and all but New York Life experienced a drop in their dividend interest rate (DIR).

These Big 4 mutual carriers are among the most solid, stable businesses in the country. Unlike the vast majority of carriers, which sell their products through a brokerage system, the Big 4 sell their products directly to the public through an agency system of career agents tied to the companies. The career model tends to increase persistency and repeat business among clients and loyalty among agents. However, even these firms have felt the sting of low interest rates and are struggling with their investment returns. As we noted in our prior post, Northwestern Mutual’s chief investment officer told the Milwaukee Business Journal that the low interest rate environment resulted in the company’s generating $6 billion less in income than it would have in a normal interest rate environment.

The DIRs below-right represent the investment components of the dividends paid. Other factors besides the investment portion include 1-divactual expenses and mortality experiences. If mortality and expenses are more favorable than expected, it positively affects the dividend paid.

While the DIR may have dropped at most of the carriers, the actual total dollar amount paid out to policyholders actually increased at two of the carriers. Policyholders own mutual carries like the Big 4 carriers, and the divide1-payoutnds received represent a portion of the divisible surplus left after all expenses and claims have been paid. As can be seen in the chart to the right,  New York Life and Guardian Life will pay out more to policyholders in 2017 than in 2016.

Since the presidential election, we have seen a bit of an upturn in interest rates, and many prognosticators are anticipating a trend to higher rates in the Trump administration. An article in the Wall Street Journal last week cited the head of U.S. short-rates strategy at a major US bank, who believes that “government bond yields are likely to rise further.” That same article pointed out that “Investors have been scrambling for the past two weeks to position themselves for a Trump presidency that they believe will mean higher growth, higher inflation and a Federal Reserve that will be under pressure to raise interest rates in a way that hasn’t been seen for more than a decade.” (1.) While higher rates are not a simple fix, as they will affect many parts of the economy negatively, for many carriers that rely on fixed vehicles as their primary investment, higher rates, on balance, would be welcome.

  1. Traders Convinced Higher Rates Are Near, Wall Street Journal, by Min Zeng, November 23, 2016

New York State Floats Regulation To Require Life Insurance Carriers To Justify Cost Increases

Yesterday, the New York State Department of Financial Services proposed a new regulation designed to “protect New Yorkers from unjustified life insurance premium increases.”

In a press release dated November 17, 2016, Maria T. Vullo, the Financial Services Superintendent, proposed a regulation to “govern life insurance company practices related to increases in the premiums of certain life insurance and annuity policies.”  The regulation would provide the agency the opportunity to review increases by requiring the carriers to provide notification “at least 120 days prior to an adverse change in non-guaranteed elements of an in-force life insurance or annuity policy.” In addition to notifying the agency, the regulation would require the carriers to “to notify consumers at least 60 days prior to an adverse change in non-guaranteed elements of an in-force life insurance or annuity policy.”

According to Superintendent Vullo, “under New York law, life insurers may only increase the cost of insurance on in-force policies when the experience justifies it and only in a way that is fair and equitable.” She went on to note that her agency “will not stand by and provide life insurers free reign to implement unjustified cost of insurance increases on New Yorkers simply to boost profits.” (1)

The regulation is designed to “establish standards for the determination and any readjustment of non-guaranteed elements that may vary at the insurer’s discretion for life insurance policies and annuity contracts.” It requires carriers to “establish board-approved criteria for determining non-guaranteed charges or benefits” and mandates an agency review of “the anticipated experience factors and non-guaranteed elements for existing policies whenever the non-guaranteed elements on newly issued policies are changed.” The regulation defines experience factors as “investment income, mortality, morbidity, persistency, or expense that represents the insurer’s financial experience on a policy. Profit margin is not an experience factor.” (2)

An article in The Wall Street Journal (WSJ) notes that although the regulation only applies to New York state, it “could be widely copied by other insurance departments.” We at ITM TwentyFirst have reported often about the cost of insurance (COI) increases that have hit the life insurance industry and the lawsuits that have followed. The WSJ article reports that those lawsuits have alleged that “insurers are hiding behind the little-used contract provisions to rummage up cash for shareholder dividends.” But the article also points out that “insurers maintain they are acting in accordance with policy provisions allowing higher charges up to a maximum amount, based on expectations of future policy performance.”  (3)

According to the press release from the New York State Department of Financial Services, “the proposal is subject to a 45 day public comment period following publication in the State Register on November 30, 2016 before its final issuance.”  We will be following the progress of the proposed regulation and provide updates when warranted. For a copy of the NY Department of Financial Services Proposed Insurance Regulation 210, contact mbrohawn@itm21st.com.

 

  1.  NY Department of Financial Services Press Release, November 17, 2016
  2. NY Department of Financial Services, Proposed Insurance Regulation 210, November 17, 2016
  3. New York Regulator Aims to Require Life Insurers Justify Higher Rates on Old Policies, Leslie Scism, The Wall Street Journal, November 17, 2016