Insurers in Waiting

• Ronald J Panko
• April 2004
• 

One might expect a sense of urgency among state officials to help life insurance buyers pay lower rates. One might expect the insurance industry to be eager to design new kinds of products that a new mortality table can engender. One might, but that doesn't seem to be the case.

Instead, only 21 states had adopted the 2001 Commissioners Standard Ordinary Table, or a close facsimile, as of late February, despite the fact that the National Association of Insurance Commissioners approved the model regulation in December 2002. The industry's trade association, the American Council of Life Insurers, expects a majority of states to approve the new mortality table by the end of this year's third quarter, but full-scale nationwide acceptance of the 2001 CSO won't be likely until 2007 or 2008.

The new table reflects improving longevity and assumes insureds will die by age 120, 20 years beyond the cutoff established by the 1980 CSO Table that went into effect in the mid 1980s. As a result, it drastically reduces the reserves insurers will be required to hold, thus affording them opportunities to redesign products and to reduce premiums.

"Actually, the states are adopting the table more quickly than we expected," said Paul Graham, the ACLI's chief actuary. "Originally, we thought half the states would have acted by this time next year." But Graham said the ACLI's board of directors changed its policy at its January meeting and will now start to actively support adoption once the issue "starts getting onto a state's radar screen."

A Long, Cumbersome Process

The adoption process highlights the complexities and time-consuming nature of state regulation when it must address an issue of national significance. Most states adopt the table through an administrative process initiated by insurance departments. To speed the adoption process and to promote uniformity among the states, the NAIC model regulation included a deadline of Jan. 1, 2009, for adoption by all states, despite the fact it has no power to enforce such a deadline. According to Graham, the ultimate reason for the deadline is that the U.S. Treasury Department has rules on how much insurers can deduct for income-tax purposes, and the rules provide for a three-year transition period. "Three years after 26 states have adopted the new table, the Treasury will require that all insurers use the table for their tax returns," he said. "You don't want states to have differences for reserving and for tax purposes."

A few companies have already gained a competitive advantage in the term-life product line by lowering prices. Term life policies are expected to be most sensitive to reductions in required reserves. But Robert Bland, founder and chairman of Quotesmith.com, an online insurance brokerage, said term life rates of the many companies with which he deals have remained about the same over the past year and haven't changed much since Sept. 11, 2001. Through the Quotesmith Web site, www.insure.com, visitors can obtain life insurance quotes from about 90 companies. Insure.com is a wholly owned subsidiary of Quotesmith.com.

Bland said the stable rates in the term-life product line are probably attributable to insurers, the past couple of years, earning less on their investment portfolios as bond rates have fallen to 40-year lows. Reinsurance also has cost more or has not been available at all for life writers, he added.

Phil Young, who as market reporter for Quotesmith is the first at the company to see new rates, confirmed Bland's observations. "There really hasn't been too much action," he said. "We usually receive notices of rate changes a couple of weeks or a couple of months in advance, and we don't anticipate any rate decreases."

Bland said the most popular writer of term insurance at his Web site is currently the Milwaukee-based American General subsidiary of American International Group. Rounding out the top four are First Colony, a subsidiary of General Electric based in Lynchburg, Va.; Banner Life, a subsidiary of Legal & General Group plc. based in Rockville, Md.; and West Coast Life, part of the Protective Life Corp. and based in Omaha, Neb. A recent new product selling on the site is a new breed of universal life policy built on the concept of level premiums for life. "These premiums become very reasonable at age 70 and above," Bland said. "They are generally bought by wealthy people in the estate-tax planning market."

Special Lower Rates

Two insurers that have lowered their term rates are not on the radar screen at insure.com because they are direct writers. Both USAA Life Insurance Co., San Antonio, and Savings Bank Life Insurance Company of Massachusetts, Woburn, Mass., have lowered their term rates this year. Texas and Massachusetts are among the 21 states that have adopted the new mortality table.

SBLI's term-life rate cuts averaged about 15%, but ranged from 3% to 49%, depending on the age and underwriting class of the prospect. The company began using rating classes in 2003. Under its new rates, SBLI quotes an annual premium of $465 for a 35-year-old person (Massachusetts requires unisex underwriting) in the preferred-plus class for $500,000 of coverage at level premiums for 30 years. That rate is down from $495 in 2003 and $600 in 2000. About 30% of prospects qualify for preferred-plus underwriting, said SBLI President Robert Sheridan. Sheridan said the company had been planning since early 2003 to lower its rates, and it did as soon as Massachusetts' new mortality table became effective on Jan. 1. "We have a low-cost and profitable product, and we hope we sell a lot of it," Sheridan said. The biggest rate decreases are for younger buyers, he said.

About 75% of SBLI's business is in its home state, but the company sells in 12 states in the Northeast and as far south as Virginia, Sheridan said. Many of those states, including New York, New Jersey, and the other five New England states, have not adopted the new table. But Sheridan said the differences in required reserves among states should not hinder his company's marketing in other states, though they make the business more complicated. "We can offer as low a price in New Jersey as in Massachusetts," he said. "Worst case, if we have to go with the 1980 CSO Table, our results would not be as profitable."

Sheridan lauded the "vision and expeditious action" by Massachusetts' insurance commissioner, Julianne M. Bowler, and he urged "engagement" by the life industry to talk to state commissioners, as the ACLI recently decided, to "get their act together."

"I wouldn't say any state is troublesome," he added. "Every state has a nuance or regulatory quirk, but the states are responsive and very professional in dealing with you, and they're out to protect the consumer." Through the first three quarters of last year, SBLI had written $158 million in net premiums and had capital and surplus of $180 million, according to A.M. Best Co. data.

Bland said that SBLI of Massachusetts, as a direct writer, "is like the Geico of the life world" in that he would expect it to be "very efficient and price-competitive." Geico Indemnity Co., part of the Berkshire Hathaway Insurance Group, uses direct marketing to sell lower-cost personal auto insurance.

Texas was one of four states to adopt the new mortality table in 2003, and USAA Life issued a press release on Nov. 15 in which it claimed to be the first insurer in the country to implement a lower rate schedule. The new rate reductions range from 10% to 30% and are available to USAA members in 39 states and the District of Columbia. USAA Life is a wholly owned subsidiary of United Services Automobile Association, a reciprocal interinsurance exchange serving members of the military. Through the first three quarters of last year, USAA Life had written $765 million in net premiums and had $683 million in capital and surplus.

USAA did not respond to requests for an interview, but Graham said that when companies try to sell a product in states that have not yet adopted the new mortality table, the reserves they are required to hold apply to all products, not just a certain line. That enables them to use reserves for other products to offset any shortfall in reserves for a single product line, such as term life. Each state has a say about the amount of reserves that a company holds, he said.

SBLI USA, a mutual insurer based in New York, announced on Jan. 26 lower rates on its 10-, 15- and 20-year term-life products, but did not mention the new mortality table in its release. The company declined in February to comment publicly about its lower rates.

Wanted: A Clearer Picture

Most of the life industry, however--and especially companies that write business nationwide--have yet to take any action in response to the new mortality table. That includes the Hartford Life Insurance Co., which has not reflected the table in any of its products. "We really need a lot more states to adopt the table before we can effectively use it," said Tom Kalbach, assistant vice president, individual life products and financial analysis. "We'd like to be able to use the table, but we need to comply with the standards of every state."

Kalbach said the status quo industrywide will probably prevail through this year, but he expects more companies to make changes in 2005. "I'm not aware of any companies actually using the new table with the exception of USAA, which is in a unique situation in that it sells most of its term life policies in Texas," he said. "Insurers that have more of a regional focus in sales have some opportunities to use the table." Kalbach was unaware that SBLI of Massachusetts had lowered its rates, and he said that SBLI does not impact Hartford competitively.

First Colony, which is in a "quiet period" due to its planned spin-off from General Electric, dramatically increased its sales of term life in 2002, when it issued more than $66 billion, up from just $58 million in 2001, according to A.M. Best Co. data. Since 2002, its term-life sales have remained steady, said Jimmy Atkins, executive vice president and chief actuary. In response to a question about rates, he said First Colony has "worked to stay competitive" in that product line.

The company's state of domicile, Virginia, had not yet adopted the new table as of late February, so that life insurers based there must still post reserves based on the 1980 CSO Table. Atkins declined to discuss pricing strategy for competitive and legal reasons, but he said that while adoption of the new table would lower reserve requirements, it would have no effect on claims, expenses, lapses or anything else that drives pre-tax cash flow. First Colony has not been lobbying states to adopt the new table, he said, but when 26 states adopt it, the company will encourage the other states to do so. "At that point, it will be three years before the tax requirements change, and we would like each state to be on the new table by the time that change occurs," he said.

Once the new table takes root, prices might fall. Diane Koken, Pennsylvania's insurance commissioner, said in January that state residents might see life insurance rate reductions. And Bland indicated that term-life insurance products are good candidates for lower rates. "The U.S. term-life market is a follow-the-leader market," he said. "If one of the best companies on our Web site lowered rates, other carriers would follow shortly."

Term life likely would be the first of new products to emerge as more states adopt the new table because it is the easiest to develop, according to Graham. Universal life and whole life are "trickier" to develop, but companies are starting to perform the product-development work they need in those lines, he said.

Ironically, the new mortality table will at least partially reverse the effect of the much-debated Triple X reserving regulation that the NAIC adopted in March 1999 and that states began to implement in 2000. Triple X caused insurers to hold greater reserves for life insurance products, particularly term life and universal life. Graham said it is a "tough call" as to whether the new table would offset the higher reserves of Triple X. He said it might at certain underwriting ages and classes. Sheridan said the new table in Massachusetts mitigates Triple X, but doesn't offset it. He added that the effects on reserving vary by the underwriting bucket. Kalbach said the new table would "reduce the aggregate reserves required under Triple X," but that low investment yields and the hard market in life reinsurance would dampen the effect the new table may have.

see "States Pick Up Pace in Making New Table Law"

By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com