Term Insurance Rates: The Ball Is In The Reinsurers Court

The companies do not want to approach their reinsurers and discover that their reinsurance rates may be considerably higher than the rates they are receiving on their current term portfolio.

The insurance companies may also discover a push by reinsurers to offer yearly renewable term (YRT) reinsurance rather than coinsurance. YRT reinsurance minimizes surplus strain for the reinsurer but creates more surplus strain for the direct writing company.

On the product front, insurers are attempting to differentiate their term policies either by the programs used to sell the term or by features they include with the product. Companies also are continually refining their underwriting process in an attempt to speed the time it takes to issue a policy or to improve the selection process. The preferred underwriting criteria especially continue to evolve.

Programs that continue to be used are table shaving, class improvements and internal conversions. With table shaving, insureds with a minor substandard rating are treated as standard. Class improvements include the insured changing to a rating class with lower premiums if some improvement is shown in their underwriting criteria (such as cessation of smoking or controlled cholesterol at a lower level).

Internal conversions to whole life insurance continue to be encouraged by companies and are often supported by conversion credits.

The 20-year level premium guarantee period continues to be the most popular premium guarantee period with 10-, 15- and 30-year periods also offered to the insured. The term policies often include a critical illness benefit that allows for a prepayment of a portion of the death benefit should the insured become critically ill and be expected to die within a short period. Waiver of premium and accidental death riders are also available.

The return of premium benefit has become more popular in the last few years. The ROP rider has been around for a long time in the mortgage term marketplace. Now, the rider is making its way into the mainstream term market by advertising very attractive return on investment rates.

More insurance companies are starting to offer the ROP rider, but several are staying away from the product because of pricing risks. Adding a rider to a term product makes the profitability of the product much more dependent on the long-term investment rate and the ultimate lapse rate.

As the term market continues to evolve, the players can no longer expect to see the continuing decrease in premium rates of the past several years. The reinsurance companies will have a big influence in premium rates as the business goes forward. Direct companies will continue to differentiate their products through features and riders, and the way they sell their product.

, FSA, MAAA, CLU, ChFC, is a consulting actuary with Milliman USA in the Indianapolis office. His e-mail is [email protected].

Reproduced from National Underwriter Edition, July 1, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.