Eight Predictions For Life Insurance
February 23, 2010 by Timothy Pfeifer
Economic, demographic and regulatory forces have traditionally shaped the direction of life insurance offerings. This will continue in at least eight areas. First, let’s consider what has already happened:
–The business saw the rise, fall, and rise again of term wars in the last decade, in an environment of improving mortality and overly-conservative reserve standards.
–Survivorship products enjoyed solid success until the fate of estate taxes became a guessing game.
–A rising equities market supported a steady rise in variable life sales, but a plummeting market with low interest rates torpedoed this since VLs couldn’t deliver the guarantees of their variable annuity cousins.
–A surge of interest in indexed life insurance followed, with its theme of index participation without downside risk.
–A lower interest rate environment has led to a transformation of universal life, from a tax-efficient accumulation sale to an extended death benefit guarantee sale, where lapses may be a good thing for the carrier and where the typical customer is over 55 (and even 65) years old.
–In the same low interest environment, whole life has held its own, and even picked up market share in recent years.
Meanwhile, regulatory activities have steered the life insurance industry towards more analyses, greater disclosure, and a strong focus on suitability.
Technology has enabled insurers to know more about their business than ever. Those capabilities will be needed as more sophisticated financial analyses will be required going forward.
The tax treatment of life insurance has come under almost constant threat, but the fundamental tax rules have withstood these threats. Most tax activity has been in clarifying treatment of existing elements.
Distribution of life insurance is still dominated by captive and independent producer specialists. Banks, wirehouses and direct marketers have picked up some volume, but are still minor players.
Sales compensation is still heavily heaped, maybe increasingly so in the independent agent space.
Underwriting is becoming more sophisticated and more reliant on technology, with heavy focus on large policies and risk assessment innovation for older applicants (e.g., prescription databases and cognitive testing).
What is on the doorstep now? Here are eight thoughts.
1) Interest rates. It’s hard to envision a large rise in interest rates in the next few years, though modest increases are likely. Subdued rates will pressure fixed accumulation and UL secondary guarantee (ULSG) products, but have less impact on indexed UL. A meaningful, steady upward rise, however, would be the biggest positive boost to life sales in the next few years.
2) Estate taxes. Clarity around estate tax rules will re-engage survivorship sales.
3) Equities markets. The markets will generally move up, but with regular periods of choppiness. This favors indexed UL, but challenges VL sales.
4) Mortality. Improvements will continue, but at a slower pace than in the past. There is simply a limit to how quickly mortality can be underwritten out of life insurance. Reinsurers will play a vital role in keeping small and mid-sized carriers in the game.
5) Regulation. Regulatory activity will tighten requirements around sales practices and disclosure. Agent training and communication will be critical. Efforts to mandate more principle-based approaches to insurance liabilities will help some products (e.g., term) but have smaller or negative effects on others (ULSG). Core tax advantages of life insurance will remain.
6) Target markets. Boomers have money and have reasons to believe in the benefits of life insurance. Accordingly, carriers must develop messages and processes that appeal to the older age market. The growth markets for life insurance are female, Hispanic, Asian, and African-American. Distributors having affinity relationships with these growth markets will need to be developed.
7) Compensation. Commissions will be less heaped, not level, but more levelized. This seismic boost to life products needs to occur in order to move products to the next level. Strong leverage exists in product pricing if sales compensation is levelized—products can be cheaper, more attractive, and reps can sell more and may even increase their overall compensation.
8) Life settlements. Continued emergence here will require comparable offerings by life insurers and/or joint ventures. Disclosure of settlement options to policyholders will be broadly required.
Tighter profit margins, smaller product portfolios, and greater in-force management all lie ahead for insurers and producers. One thing is definite: The next 10 years will be very interesting and challenging for those in the life insurance business.
Timothy Pfeifer, FSA, MAAA, is president of Pfeifer Advisory, LLC, Libertyville, Ill. His email address is firstname.lastname@example.org.