Challenge to life companies

[Brad Howard]

Ah, , this all makes sense now..... It's always good to hear from you. Best wishes to you and I appreciate the kind words.......

[glenn]

I've just done some heavy editing in this thread. Discuss as heatedly as you like but note the following:
- no personal attacks, particularly without facts. Tear apart opinions, dispute ideas. I'll let a bit of brisk commenting go, but not at the level we've been seeing here.
- no speculation on identities of anonymous posters please.

[Robert L. Barney]

14U2C writes:

"There is no such product as a term to age 75 admitted in any state in this country. Unless, of course, your 10,15,20,25,or 30 year term brings you to this age."

Well this says it all.

Let me ask this, if a product has the following optional periods:

10
12
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

and those ended at ages 65, 70 and 75, would it be accurate to say they are level to 65 or level to 70 or level to 75? Were you aware that these are the optional periods offered in AIG's Select-a-Term?

On another note. One company has indicated to me that they are preparing to send me no lapse U/L premiums which guarantee the premium and coverage to ages 65, 70 and 75. The company's to age 100 product is quite competitive and we hope their 65, 70 and 75 number are as well. We'll get those added as soon as possible.

I continue to get excited about the prospects of this becoming a new product trend in the market.

[Robert L. Barney]

http://www.prweb.com/releases/Term4S...rweb525284.htm

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Compulife Issues Challenge to Life Insurance Industry

(PRWEB) May 10, 2007 -- Compulife Software Inc. is challenging life insurance companies to create a new series of level term life insurance products to provide consumers with level premium policies to retirement. In conjunction with this challenge Compulife has introduced the following level term categories to its life insurance comparison software:

- to age 65 level guaranteed
- to age 70 level guaranteed
- to age 75 level guaranteed

Consumers can access the Compulife database of over 125 life insurance companies by visiting www.term4sale.com. Term4Sale is the most unbiased comparison software available on the web because Compulife does not sell life insurance. Consumers using www.term4sale.com can obtain instantaneous term life insurance comparisons without divulging their identity which means that no agent will call.

The first product that Compulife has added to the new categories is American General Life's new "Select-a-Term". "Select-a-Term" offers insurance buyers a range of level insurance premium periods between 10 and 30 years. In order to fit the product into the new 65, 70 and 75 categories, Compulife has hand picked premiums to fit the age and the period. For example, if a 47 year old wants a level to 65 policy, they would need an 18 year level term period. Using www.term4sale.com the 47 year old simply selects the level to 65 comparison category and the premium for the 18 year Select-a-Term is automatically quoted. If the same consumer wants coverage to age 70, they select the age 70 category and the program quotes the 23 year level premium.

Compulife president Bob Barney commented, "The Select-a-Term" product is a good start for our new categories but there is a problem. Insurance buyers younger than 35 cannot buy long enough level periods to get to age 65. For example, a 25 year old insurance buyer needs a 40 year level premium." Barney believes American General will broaden their selections if they receive a positive consumer response to the concept.

Compulife has e-mailed its challenge to life insurance companies and has posted the challenge to:

http://www.americaninsurancebroker.c...read.php?t=843

Compulife is pressuring the life industry to respond to the problem which faces younger insurance buyers. Barney explained, "It is a serious omission that younger adults with children, who have the greatest family obligations and the greatest needs for life insurance, can't get level term premium guarantees longer than 30 years. That's just wrong and it is my hope that the new categories in Compulife, and the initial product offering of American General, will cause the rest of the industry to wake up and pay attention."

Initial reaction to the Compulife challenge is mixed. Some companies have expressed initial interest while some have argued that longer level periods represent reserve problems. Barney isn't buying that. He asks, "What's a more expensive and risky proposition for a life insurance company, insuring a 50 year old for 30 years or insuring a 20 year old for 45 years? In today's market a 50 year old can buy a 30 year level term product from a number of different life insurance companies. The 50 year old who does so has a level premium and coverage to age 80. By contrast a 20 year old can't go longer than the same 30 years. Where's the sanity in that?" In Barney's view there is much more risk for a company to insure the 50 year old between ages 65 and 80 than there is to insure the 25 year old between ages of 50 and 65."

Some agents have told Barney that most younger buyers just want the cheapest thing and buy 10 year term. Barney shakes his head when he hears that. In his view term life insurance buyers need to buy level term that covers them to their expected retirement age. If that isn't available Barney advises that they need to go as long as possible. Barney has published an article on the subject at Term4Sale:

www.term4sale.com/golong.htm

Compulife believes that most agents are not making much effort to sell younger insurance buyers because premiums are just too small to generate sufficient commissions. Today a person age 25 can purchase $500,000 of 10 year term life insurance for as little as $115 per year. A 30 year policy is more expensive with prices starting at $370 per year. But even at $370 many agents do not think it is worthwhile making a sale of that size and so many younger consumers are left to fend for themselves.

Barney guesstimates that prices for a 40 year $500,000 term policy to a 25 year old non-smoker would start in the range of $450 to $500 per year, making the sale much more worthwhile for the agent. More important the consumer would be getting a guaranteed premium for as long as they need term (to retirement). In today's market the only other option is for the young consumer to buy a whole life policy and the least expensive products begin at about $1,400 per year.

"Term to retirement, such as level term to 65, is a win-win-win product for everyone involved", reasons Barney. "It gives the consumer a guaranteed premium for as long as he or she could possibly need term insurance. It gives the agent a sizeable enough premium to process the business and it gives the life insurance company a long term relationship with a buyer who will no doubt need more insurance as they advance economically."

Bob Barney
Compulife Software, Inc.
My Office Toll Free (888) 798-3488
Main Office (800) 798-3488

[actuary_guy]

A 40-term for an age 25 person is not going to happen under the current regulatory environmnet. If you understand how regulation XXX works and why it came about you'll start to see why.

In the 1990's insurance companies would guarantee say a 30-year level premium and have to hold reserves based on the statutory mortality tables provided by standard valuation law.......which would create much higher reserves than needed based on the mortality tables used to price the product.....i.e. you would have to hold to the side in reserves more than you are bringing in premium. Insurance companies would side-step this inconvenience by realizing that Reserves are simply the actuarial Present Value of Benefits minus the actuarial Present Value of Premiums paid.....

So you could lower reserves on a 500,000 30year level term with a monthly premium of say $40 a month.....by guaranteeing that once the end of the term is reached the customer could continue purchase with annually renewable premium of say $500 a month in year 31, $1000 a month in year 32 $5000 a month in year 33 etc....etc...etc....$50,000 a month in year 40....etc.

If you increase the guarantee premium stream in the future the overall reserves are lowered........
Now here's the problem......who's going to pay $50000 a month for $500,000 in coverage.....nobody right? But as long as the company guaranteed that a customer could pay those premiums on a guaranteed basis to continue coverage then those premiums COULD be used in the calculation of the reserve.

This is why REGULATION XXX was born.....because insurance companies were using this loophole.

So now REGULATION XXX states that if the slope of the increase in premium in ANY year is greater than the slope in the valuation mortality rate in that year.......then a new segment is created and the reserves of the 30-year level term period can ONLY be calculated based on the 1st 30 years instead of the guaranteed stream of ridiculously high premium to follow.

Robert Barney's comment that there is nothing magical about 30 years......what happens at 31 years is well taken.

Well, the answer is that it is a strain for insurance companies to reserve for 30 term....25 yr and 20 in some cases. The insurance company PRICES the product based on the PRICING mortality tables and therefore "should theoritically" hold reserves based on those mortality tables.....however state insurance departments' biggest fear is "what if the insurance company was too aggressive and underestimated mortality....in other words figured everyboy on average would live longer than they actually will......then the insurance company would be UNDER reserving.....and that is what state insurance department's main concern is. And rightfully so there job is to insurance that insurance companies are solvent. It is not there job to sell insurance."

So the state insurance departments make us calculate and hold reserves based on more conserative mortality tables......so how do insurance companies make a profit if they are reserving more than they are taking in?

Well, the answer is that they are allowed to reinsure though letters of credit or securitization the redundant XXX reserves.....i.e. the difference between the RESERVE based on STATE MORTALITY TABLES and the RESERVE based on PRICING TABLES.

The redundant XXX reserves are high for 20 year term ......higher for 30 year term and simply not doable for 40 year term......because banks will not write letters of credit for such high amounts

Well, in summary before you start banging down the doors of state insurance departments.......state insurance departmens are currently working on a principles based reserve approach where companies will be allowed to use actual company mortality experience with some room for adverse deviation that may make a 40 year term possible?

[Robert L. Barney]

And so banging on regulator doors would do not good, is that your position?

Why?

[actuary_guy]

It might do some good in terms of the speed at which they pass a principles based reserve approach.....but like I said they are already working on it. And even then once it is adopted...it will take insurers some time to become aquainted with the new regulatory environment before they launch such a ambitious product change as a 40 year term.

Also I think it's interesting that you commented that a 25 year old can get a 10 yr term for $115 a year, 30 yr term for $370 a year and a reasonable estimate for a a 40 yr term would be $450-500 a year.

One thing I think that you are not considering is that there are increased costs associated with pricing a 10 yr term that diminish as you move to a 30 yr term and there are new costs that pop up with 30 yr term that do not exist as much with 10 yr term.

For 10 yr term the main pricing issue is anti-selection........who is going to buy a lot of 10 yr term?........well if you know you are unhealthy then you might. So anti-selection in 10 yr term is much more prevelant than 30 yr term.......and actually most life insurance companies today don't currently offer 5 yr term because the anti-selection is so bad that they SHOULD actually charge more for 5 yr term than for 10 yr term. So who would buy 5 yr term when you could get 10 yr term cheaper?....nobody.

For 30 year term the main pricing difference when compared to 10 yr term is excess reserve strain due to regulation XXX. We've already discussed this. The strain will be much greater for 40 yr term and the reserve strains are not linear they are more exponential than linear......and so I am sure that 40 yr term for a 25 yr old would not be priced in the $450-500 range under the current regulatory environment. It would be much higher. Under a principles based reserve apporach maybe....it would or could be in the $450-500 a year range....but not now.

[actuary_guy]

Mr. Barney,

I do agree with you that select-a-term will cause other companies to wake up. I think one of the greatest aspects of it is that preferred 55 yrs old can get 30 yr term and now 56 yrs olds can get 29 yr term , 57yr olds can get 28 yr term........etc.......whereas before there were un-necessary gaps in insurability. I think the baby boomer generation has more insurance needs than any other retirement generation before them and they are certainly too financially savvy to waste money on 30 yr insurance if they only need 27 yrs......so I think this product has miles and miles of potential.

I also agree with you that a 40 yr term product and all the years between 30 and 40 are needed. And like you I wish the regulatory environment was set up to make this possible. But I do believe state regulators are working towards this. However, their focus is probably on eliminating "way over-rendudant reserves" so that products could be more reasonably priced for consumers. I'd be curious myself to know if many regulators out there share your same vision of a term-to-retirement product for 20 yr olds?

[Robert L. Barney]

Glenn,

Could you post a link to this thread at the actuarial bulletin board, and see if we can get some other comments on what this "actuary" is raising. If he is correct, and regulation is a problem, then I think a campaign to insurance commissioners may be in order.

The fact that a 50 year old can get guaranteed premiums to age 80, but a 25 year old can't get guaranteed premiums to 65, is so obviously distorted that an age based change is desperately needed.

If I can get some other opinions on this I would be happy to launch a letter writing campaign together with press releases.

In the meatime, I hope other companies share this actuary's enthusiasm for the Select-a-Term concept, and bring out products to compete.

[JMO Fan]

Originally Posted by Robert L. Barney

Glenn,

Could you post a link to this thread at the actuarial bulletin board, and see if we can get some other comments on what this "actuary" is raising. If he is correct, and regulation is a problem, then I think a campaign to insurance commissioners may be in order.

The fact that a 50 year old can get guaranteed premiums to age 80, but a 25 year old can't get guaranteed premiums to 65, is so obviously distorted that an age based change is desperately needed.

If I can get some other opinions on this I would be happy to launch a letter writing campaign together with press releases.

In the meatime, I hope other companies share this actuary's enthusiasm for the Select-a-Term concept, and bring out products to compete.

The obstacle is the Standard Nonforfeiture Law. It has been a statute in all states, largely unchanged for over 65 years. Reforms have been proposed numerous times, especially over the past 25 years, but have always failed.

The principles-based reserve approach gives the best hope of nonforfeiture reform. However, the principal obstacle to the last effort was (in the opinion of DC tax counsel) that the proposals to cut cash value requirements would result in taxation of the inside buildup. It is unclear whether that is still a concern.

In 1987, Missouri passed a law permitting 0-cash value life insurance if an otherwise-similar policy is offered that has cash values. Disclosure of the premium reduction due to 0-CV is required. Thus far, it doesn't appear that any company has such a product in Missouri, probably because it can't be issued in any other state.