Most Competitive Life Insurance Pricing Continue to Increase and/or be Withdrawn

As foretold by THEInsuranceAdvisor.COM in Volume 08 Issue 37, and again in Volume 09 Issue 16 insurance companies continue to increase pricing and/or withdrawn their lowest cost products. In addition, depending on whether or not the bond, equity and credit markets continue to struggle or begin to improve, products that are available today may continue to be replaced with different product and/or product types in the future, and the rate increases for term and other products that include contractual guarantees are anticipated to be in the double digits for some carriers.”^[1]

Of course, the largest cost in any insurance product is the cost of paying claims. In life insurance, this cost of insurance (or COI for short) is the cost of paying death claims. As people live longer, insurers pay fewer death claims in any given year, have longer before the death claim is eventually paid, and in some cases do not pay a death claim at all because the term of coverage expires before the death of the insured (e.g., 10-year term insurance).

Generally speaking, the longer the period of time before an insurer expects to pay a death claim, the lower the premium each year. This is because the insurer can both A) spread the cost of the death claim over a longer period of time and B) collect and invest premiums and grow reserves to the amount needed to pay death claims over a longer period. These are the similar reasons why a mortgage payment for a 30 year mortgage is lower than the mortgage payment for a 15 year mortgage.

For these reasons, life insurance costs/premiums had been generally decreasing as life expectancies had become longer. However, premiums for certain types of life insurance are now on the rise due to the Sub-Prime Crisis and the continuing, volatile economic environment. On average, at least one insurer a week has changed their pricing of one or more products or pulled a product from the marketplace. In addition, dividend interest crediting rates experienced the largest decrease on average than in any year since 2002.

As with all forms of life insurance, the lower the actual interest/earnings credited to policy cash values and thus available to pay COIs and policy expenses over time, the greater the premiums must be to pay such COIs and policy expenses. In addition, premiums have also increased over the past few years due to relatively new and more conservative reserving requirements (i.e., Regulations AXXX also known as AG38 and XXX) under which the insurer must hold (i.e., reserve) greater amounts of capital for each $1 of life insurance death benefit issued. Now, for both these reasons, premiums for both many types of life insurance products are increasing and will likely increase further.

This is because Letters of Credit (LOC) are used by the insurers to help relieve the capital pressures created by the more conservative reserving requirements and the costs of these LOCs are still higher than when many of these products were originally priced. As explained in the October 10, 2008 issue of Standard & Poor's RatingsDirect, with the past economic environment, the cost of LOCs has increased, and as such term product prices were likely increase early in 2009. Well it is early 2009, and we have already seen prices/premiums increase for both fixed-duration term products (e.g., Level 10-Year Term) and flexible-duration term products (i.e., technically referred to as universal life with secondary-death benefit guarantees or guaranteed UL).

In addition, the forces behind this trend of increasing prices/premiums for life insurance show no signs of relenting, and as such, prices/premiums for life insurance will almost certainly continue to increase. In fact, Jim Benson, CEO of Benson Botsford LLC and past CEO of several of the largest life insurers in North America, foresees “a significant return to conservative pricing of products due to insurers choosing solvency over sales and a reduction in their tail risk” (Valmark Securities 2008 annual continuing education conference) beyond this immediate pressure on the pricing and profitability of life insurance products.

Do you have clients who do not know what they are actually being charged for cost of insurance charges (COIs) and/or are considering a purchase of life insurance? Do you know if the costs of your (client's) policies have been increased?

If you would like more information about product pricing for a particular client, then contact one of our Insurance Banking® Centers or contact us directly and we can refer you to the Insurance Banking® Center nearest to you. Also use the Confidential Policy Evaluator (CPE) Research Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for you(r) clients' policies based on the 5 factors of suitability. Click here and get up to 3 Confidential Policy Evaluator (CPE) research reports under our NO-RISK trial subscription.