Voya Financial is lowering the cap and participation rates on some of its indexed universal life insurance policies because of rising market volatility.
Security Life of Denver Insurance Co. and ReliaStar Life Insurance Co. of New York, which issue Voya's life insurance products, will lower the index cap or participation rates on contracts pegged to the S&P 500 index, the most popular index used in IUL products. The changes affect both in-force and newly issued IUL contracts.
Lower caps and participation rates mean policyholders will get a lower return on their contracts in the event of a rising stock market, all else being equal.
“Although all cash-value life insurance policies have the ability to change their non-guaranteed provisions on an annual basis, it's not something you hear about too frequently,” according to Sheryl Moore, chief executive of Moore Market Intelligence.
Voya is making the changes because of
elevated market volatility over the last several months, which in turn has caused an increase in option prices for S&P 500 indexed strategies, according to a Voya memo.
Spokeswoman Nicole Vasile declined to comment on how many policyholders will be affected by the changes or what the timing for the changes will be.
Voya joins the ranks of a handful of other IUL carriers that have altered in-force business due to the current market environment, and it wouldn't be shocking to see others do the same, according to Michael Fontanini, director of advanced sales at distribution firm Lion Street.
“We would not be surprised if many more carriers join Voya, Pacific Life, National Life, North American, and others, in taking actions to meet their options budget and pricing/profitability demands,” Mr. Fontanini said in an e-mailed statement. “It's important to note that these changes have been modest (e.g. Voya: 13.5% to 13%, Pac Life: 12% to 11%, National Life: 12.5% to 12.25%, North American: 13.5% to 13%, etc.).”
SALES
Industrywide IUL sales
have swelled over the past several years, ballooning 148% to $2 billion in annualized premiums from 2010 to 2014, according to Limra, an industry group.
Voya ranked 10th among all insurers in IUL sales through the third quarter of 2015, with 3.3% market share, according to research firm Wink Inc.'s most recent sales and market report.
Source: Limra
Note: *Through Q3 2015
According to Wink, the IUL products Voya sells through Security Life of Denver Insurance Co. are: Voya Indexed Universal Life-Accumulator, Voya Indexed Universal Life-Global, Voya Indexed Universal Life-Global Choice, Voya Indexed Universal Life-Guaranteed Death Benefit and Voya Indexed Universal Life-Protector.
The product through ReliaStar Life Insurance Co. of New York is Voya Indexed Universal Life-Protector.
Voya
saw $71.8 million in IUL sales during 2015, a 44% jump from $49.8 million the year prior, according to the company's fourth-quarter earnings announcement. Indexed universal life sales in 2015 represented the bulk — 71.6% — of Voya's sales across all individual life insurance products.
Similar to fixed indexed annuities,
which have also soared in popularity, indexed universal life insurance is pegged to a specific market index. Contract growth is limited to the upside through features such as caps and participation rates, and there's a floor in the event of poor market performance.
A cap of 8%, for example, dictates that investors get a maximum return of 8% on the cash value in their IUL policy, even if the market performs above that level. A participation rate of 70% would deliver that percentage of the index performance.
According to Wink data, the average cap on IUL contracts is 11.65%. Pacific Life made changes to its IUL caps in September last year, with the remainder occurring this year, according to Mr. Fontanini.
BUYER BEWARE
Policyholders aren't invested directly in an index through an IUL contract. Rather, insurers grant exposure to an index through the use of options contracts on that index.
Insurance experts affirm that Voya's reasoning for lowering caps and participation rates — volatility making options more costly — makes sense.
“It just stands to reason that options to hedge these indexed products are going to be much more expensive,” said Gregory Olsen, partner at Lenox Advisors Inc. “With low interest rates and high hedging costs, that puts pressure on these guaranteed products.”
Voya's move to alter in-force business serves as a reminder to advisers and consumers that indexed universal life contracts are subject to change, and highlights that policyholders bear some of the investment risk through these contracts, which some investors may not realize, according to Scott Witt, a fee-only insurance adviser and owner of Witt Actuarial Services.
“The buyer has to beware when they purchase these products that they have these types of fluctuations, and that will impact performance,” Mr. Olsen said.
Voya's alteration of in-force IUL contracts draws a parallel to the long-term-care industry, which
has seen some insurers raise premiums on in-force policies, Mr. Olsen said.
Sellers of some annuity products, such as variable annuities, are
also able to alter provisions such as payout rate, rider fees and roll-up rates under specific conditions on in-force business.
When a life insurer reduces the cap on a block of IUL business, it's typically between a range of 0.25 and 1 percentage point, Ms. Moore said. Insurers often won't reduce rates in consecutive years, and could even come back the year after a reduction and decide to increase rates.
“It would be very atypical for an insurance company to say, 'We reduced rates on this last year, let's do it again this year,'” Ms. Moore said.
