State regulators have signaled a push for recalculating reserve requirements on a certain type of universal-life insurance, a change that could lead to higher costs for policyholders, as well as fewer insurers' selling the product
State regulators have signaled a push for recalculating reserve requirements on a certain type of universal-life insurance, a change that could lead to higher costs for policyholders, as well as fewer insurers' selling the product.
A group of state insurance regulators last week approved a statement indicating that some life insurers are holding insufficient reserves — liabilities that carriers must hold to ensure that they can pay future claims — for their sale of universal-life insurance with secondary guarantees.
Regulators' focus is on a certain type of universal life policy: one that allows customers to pay a minimum amount of premiums to keep in force a secondary guarantee, which ensures that the policy won't lapse. They claim that, based on that assumption that policyholders will pay only a minimum, some companies aren't keeping sufficient reserves.
SOME PUSHBACK
Some insurers, including Genworth Financial Inc. and Lincoln National Corp., have protested, writing to the National Association of Insurance Commissioners' Life Actuarial Task Force, the group that approved the statement on reserving last week.
“There is no evidence to support the position that companies are holding inadequate reserves,” Lincoln chief executive Dennis Glass wrote in a letter to the task force's chairman, Leslie Jones, who is chief actuary of the South Carolina insurance department.
During a call with analysts last week, Mr. Glass said his company's universal-life products are reserved in a manner that complies with insurance regulations. He added that the insurer's domiciliary regulator in Indiana stated publicly that the carrier is in sound financial condition and that no reserve issues have been noted.
“I have full confidence that our reserves are more than adequate and that we comply with this particular regulation,” Mr. Glass said. “We have a lot of smart people in the NAIC who are practical and who want to do the right thing; we need to work through on this issue.”
The discussion is a long way from finalizing a requirement that insurers step up their reserves. Now that the task force has approved the statement on reserving, the NAIC's Life Insurance and Annuities Committee will take up the measure, followed by the Executive Committee and NAIC Plenary.
Higher reserve requirements likely would lead to higher prices, fewer carriers' offering the product and stunted profitability for insurers and their shareholders, observers said.
“If companies discovered how to reduce reserves and regulators clamp down, you have to ask whether the companies were making more money on the product, or did they lower their prices for customers in line with the cost savings?” said Joel Levine, senior vice president at Moody's Investors Service.
Universal life with secondary guarantees made up about 43% of new UL sales year-to-date through the second quarter, according to LIMRA. Five years ago, the product accounted for 47% of new universal-life sales.
Since the 2008 financial crisis, customers have attached even greater value to secondary guarantees.
Such sales at Commonwealth Financial Network were up more than 40% year-over-year in 2010 and continue to “chug along,” according to Brian Harrison, director of insurance marketing at the independent broker-dealer.
“I would think it's the easiest product to sell,” said Jim Swink, vice president of Raymond James Insurance Group. “You're getting a guaranteed death benefit for your guaranteed premium outlay.”
Distributors are keeping a wary eye on the regulatory development, relying for now on ratings agencies and insurers' risk-based capital metrics to reflect insurers' strength.
Most companies are holding universal-life reserves at or above economic levels, said Andrew Edelsberg, a vice president at ratings agency A.M. Best Co. Inc.
The tiff between regulators and insurers, however, will affect companies' ability to price products competitively, he said.
“It's one of those things where you're an interested observer, but it's not anything we can be involved with on a daily basis,” Mr. Swink said of the regulatory discussion. “We're never above the fray, because the bottom line is, you're recommending this product to one of your clients.”
Advisers and clients alike express a preference for the guarantee that coverage will be maintained for the rest of the customer's life, even if the cash value falls to zero, provided the client makes minimum premium payments. Further, in situations where carriers have been using lower reserves, insurers are passing the savings on to customers in the form of lower premiums.
There are few ways for insurers to wring out more costs from the product design.
LAPSE-SUPPORTED
The structure of the products makes it hard for insurers to raise premiums on in-force policies. Further, insurers' secondary-guarantee universal-life businesses are lapse-supported, which means that they count on a certain number of policyholders to lapse their coverage.
Universal-life policies with secondary guarantees have been sold for close to 10 years, insurance executives said. The American Council of Life Insurers said that the LATF group's statement appears to apply to in-force business.
“Such application would be unreasonable, given that companies collaborated with their domestic state insurance regulators before these policies were written to ensure they were in compliance,” ACLI spokesman Whit Cornman said.
SHAKEOUT POSSIBLE
Observers also noted that increased reserves could lead to a shakeout of the marketplace for universal life with secondary guarantees.
In recent years, a handful of insurers either have exited that business or repriced the policies to the point that they aren't competitive, largely due to fewer lapses than expected and lower interest rates.
Low interest rates hamper insurers' ability to earn investment income, and products that guarantee a certain interest rate such as universal life are particularly affected by low rates. Insurers that have abandoned the product include Sun Life Financial Inc. and Axa Equitable Life Insurance Co.
Greater scrutiny on reserving merely adds another challenge for market participants and could lead to more exits, said Larry J. Rybka, president and chief executive of ValMark Securities Inc., an independent broker-dealer that specializes in life insurance.
Profits also would ebb following higher reserves, another casualty of the triple whammy that issuers of universal life with secondary guarantees could face.
“Companies can take a lower rate of return on their own investments, or they can pass the loss of profitability to the customer by raising the insurance cost, or they can do a combination of the two,” Mr. Swink said.
Email Darla Mercado at dmercado@investmentnews.com
