Update on Interest Sensitive Life Products - Actuary.com

<strong>Update</strong> on Interest 

Sensitive Life Products 

Rod Rishel 

Universal Life Business Leader 

Oct 27, 2004

<strong>Update</strong> on Interest Sensitive Life Products 

• Market <strong>Update</strong> 

• Impact of AXXX Changes 

• No Lapse Guarantee (NLG) Pricing … Does the 

Market Understand the Risks? 

Genworth Financial Fall 2004 Southeastern Actuarial Conference 

1

Market <strong>Update</strong> 


2

UL Premium Growth Trend Through 2003 

$Billions 

5 

4.5 

4 

3.5 

3 

2.5 

2 

1.5 

1 

0.5 

0 

1995 1996 1997 1998 1999 2000 2001 2002 2003 

VUL+VL UL WL Term 

Source: LIMRA’s Individual Life Sales Survey and LIMRA Estimates 


3

Strong UL Premium Growth in ’04 

First Half ‘04 vs. First Half ’03 

Growth Rates 

Total Life Fixed UL Variable UL 

Premiums: 10% 

Face Amount: 9% 

Policies: 0% 

Premiums: 24% 


Policies: 1% 

Premiums: 2% 


Policies: 11% 

Source: LIMRA’s Individual Life Sales Survey and LIMRA Estimates 


4

S&P 500 Index 

5 

October '04 

Where Are We Going in ’05? 

10y Treasury S&P Index 

5.00% 

4.50% 

4.00% 

3.50% 

3.00% 

December '03 

January '04 

February '04 

March '04 

April '04 

May'04 

June '04 

July '04 

August '04 

September '04 


1150 

1140 

1130 

1120 

1110 

1100 

1090 

1080 

Interest Rate

Impact of AXXX Changes 


6

Scrutiny of AXXX 

• Considerable Recent Regulatory Scrutiny Around Potential 

Abuses of AXXX Through Creative Shadow Account Designs 

– “Technically” Compliant with the Detailed Portion of the Guideline 

• Ability to Structure Shadow Account Loads to Manipulate 

“Funding Ratio” in Steps 3 & 4 of AXXX: 

– Produce Formulaic Reserves Below Reserves Required Under More 

Traditional Specified Premium Designs 

– Possibility to Reduce Reserves Below Economically Prudent Levels 

• Current Regulatory Direction Appears to Be Heading Toward 

Modifying AXXX 

– Timing Uncertain 

– Retroactive? 


7

Reserves: Traditional Design 

AXXX Reserve Levels – Hypothetical Designs 

1,000 

800 

600 

400 

200 

0 

1 

4 

7 

10 

13 

16 

19 

22 

25 

28 

31 

34 

37 

40 

43 

AXXX – Specified Premium 


8

Reserves: Creative Shadow Account 


1,000 

800 

600 

400 

200 

0 

1 

4 

7 

10 

13 

16 

19 

22 

25 

28 

31 

34 

37 

40 

43 


AXXX - Shadow Acct Creative 


9

Reserves: More Creative Shadow Account 


1,000 

800 

600 

400 

200 

0 

1 

4 

7 

10 

13 

16 

19 

22 

25 

28 

31 

34 

37 

40 

43 


AXXX - Shadow Acct Creative AXXX - Shadow Acct More Creative 


10

Impact of AXXX Modification 


1,000 

800 

600 

Potential Carrier Impact 

• Returns 

• Capital 

• Product Redesign 

400 

Potential Market Impact 

• LOC Demand 

200 

0 

• More Focus on 

Eliminating AXXX 

Redundancy 

1 

4 

7 

10 

13 

16 

19 

22 

25 

28 

31 

34 

37 

40 

43 


AXXX - Shadow Acct Creative AXXX - Shadow Acct More Creative 


11

Other Thoughts 

Are Formulaic Reserves the Problem? 

What Is the Next Mechanism to Reduce 

Highly Redundant Reserves? 


12

No Lapse Guarantee (NLG) Pricing … 

Does the Market Understand the Risks? 


13

NLG’s Receive Lots of Press 

“Beware of What You Price for: Credit Implications of 

UL Secondary Guarantees for U.S. Life Insurers” 

Special Comment, Moody’s Investor Service Global Credit Research, July 2004 

“The Magnitude of the Underpricing in Universal Life 

Policies with No-Lapse Guarantees” 

The Insurance Forum, Belth et. al., October 2004 

“Looming Financial Implications of Universal Life: 

Regulation XXX/AXXX Considerations” 

Special Report, Fitch Ratings, Mohreweiser et. al., July 21, 2004 

“Life Insurers Face a Profit Squeeze: Cost of Policy 

Guarantees on Some Business Lines May Be 

Underestimated” 

The Wall Street Journal, Theo Francis, July 21, 2004 


14

Common Themes 

• Are the Key Pricing Assumptions Used to Price No Lapse 

Guarantees Appropriate and Is the Risk Around These 

Assumptions Understood? 

– Portfolio Yield 

– Lapse Rates 

– Letter of Credit Costs 

– Mortality 

• The Impact of Missing on Two or More of these Assumptions 

Is Multiplicative, Not Additive 

• Low Portfolio Yields and Low Lapse Rates Are Correlated 


15

Portfolio Yields 

Investment Yields May Not Support the Guaranteed Death Benefit 

for the Guaranteed Premium 

• Premiums + Investment Earnings May Not be Sufficient to Pay for Claims 

and Expenses 

• Unlike Regular UL, There Is No Ability to Raise Premium to Restore a 

Future Shortfall in Investment Earnings 

• Unlike Non-Par Whole Life, for Which the Interest Assumption Is Less 

Critical Due to Higher Premiums 

Interest Rate 

6.50% 5.50% 

Hypothetical Internal Rate of Return 

Impact Over Various Hypothetical 

Assumptions 

Lapse Rate 

5.00% 

3.00% 

16.1% 12.1% 

(4.0% ) 


16

Lapse Rates 

“Lapsers” Leave with Little or No Cash and High Profit to 

Company; “Persisters” May Become Death Claims and Provide a 

Lower Profit to Company 

– The Longer a Policy Persists, the Lower the Expected Return 

– Contrasted to Traditional Universal Life Where Returns Are Largely 

Unaffected by the Year in Which a Policy Lapses 


6.50% 5.50% 




Lapse Rate 

5.00% 

3.00% 

16.1% 

11.4% 

(4.6% ) 


17

Impact Is Multiplicative, Not Additive 

As Portfolio Yield Falls, Greater Loss on Persisting Policyholders 

– Inherit Economic Value of Option Increases as Portfolio Yield Falls 


6.50% 5.50% 




Lapse Rate 

5.00% 

3.00% 

16.1% 12.1% 

11.4% 5.7% 

(4.0% ) 

(4.7% ) 

Actual 

Decrease 

10.4% 


18

Interest Rates and Lapse Rates Correlated 

Depressed Interest Rate Environment Results in Higher Value of 

Inherit Value of Option in Contract 

– Increases the Probability the Policyholder Will Persist 

– Increases Likelihood of Contract to Be Sold in Life Settlement Market 


19

Questions? 


20

Concluding Thoughts… 


21

Update on Interest Sensitive Life Products - Actuary.com

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?