Individual Term Life insurance has been a staple of the life insurance business since the early 1980’s. Improvements in mortality and intense competition have driven down term life premiums. Sales of term life have been stable over the past five years, consistently representing about 20% of individual life insurance sales by premium. Still, due to the amount of conservatism built into statutory reserves (primarily due to the mortality levels reflected in the 2001 CSO Mortality Table), insurers have been motivated to use reserve financing arrangements and third party reinsurance as means to maintain term price competitiveness.
There are many changes occurring in the life insurance industry and in the external environment which will impact term life products in the future. Some of the more important drivers are as follows:
1. 2017 CSO Mortality Table:
It is probable that sometime in 2016, the 2017 CSO will become available as the new valuation mortality table for individual life business. Insurers will be able to adopt the new table as early as January 1, 2017 (in all likelihood), but must be fully transitioned to the 2017 CSO Table no later than January 1, 2020 (again, given current directions). It is generally believed that reflection of the 2017 CSO Table for reserves (all else equal) will lower term life premiums, particularly for the longer level term periods and older issue ages.
2. Principles-Based Reserves (PBRs):
In all likelihood, regulators will adopt PBR as the future of statutory reserve determination, starting on January 1, 2017. This approach replaces formula-driven reserves with model-driven reserves. Insurers can choose to defer implementation of PBR on a policy form-by- policy form basis, but most carriers and all products for those carriers must reflect PBR reserves by January 1, 2020, in all likelihood. The impact on term prices will depend heavily on whether and to what extent an insurer has been using reserve financing techniques to mitigate conservative term reserves. Everything else equal, adoption of PBR with reflection of the 2017 CSO Mortality Table will likely result in mild premium increases for insurers who have structured reserve financing arrangements, and premium decreases for carriers who have not structured reserve financing arrangements, but these generalizations may not reflect variances by level term period and risk class. Longer level term periods are likely to benefit less under PBR with regard to lowering prices than shorter level term periods. Questions concerning the definition of tax reserves in these transitions to PBR and the 2017 CSO are intensifying with term insurers.
3. Term Periods Offered:
The future of term life products will remain in 10, 15, and 20-year level products. There is little technical (reserve) justification for offering high ART premiums after the Level Premium Period. However, even with anti-selective lapses which occur after the Level Premium Period (LPP), many companies earn a high percentage of their term product profits in the two to three years after the LPP. In the future, look for the size of the jumps in premiums from LPP premiums to ART premiums to decrease, moderating the amount of mortality anti-selection.
4. Commissions:
The recent norm in term life commissions has been characterized by highly heaped, front-ended compensation. This is not an optimal structure for insurers, as it places nearly all of the persistency risk on the insurer and leads to an environment of mortality anti-selection. Although the heaped structure enables term sales to reward the agent for his/her efforts, the longer-term prospects for commissions in general (term and non-term) will be toward more levelization. This can lead to better economics for the insurer, and better prices for the consumer.
5. Accelerated Underwriting:
Writers of life insurance are pushing forward with approaches to speed up underwriting, hopefully without deterioration in mortality. Special care must be taken with Term Life, however, since term products face more anti-selection risk and have experienced poorer mortality historically than permanent products. Of specific concern for Term Life is the rigor of financial underwriting.
6. Other Elements:
Term products have started to “join the party” with respect to accelerated death benefits, and will continue to add in greater numbers of chronic and critical illness accelerated benefits. Finally, look for the 2017 CSO Table to generate some spark in development of Return of Premium Term, but the product will still only fit in effectively at 20 and 25-year LPPs.
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