Trends Impacting Future Life Insurance Design

The winners may be companies that anticipate needed product expertise and modeling capabilities and that develop those skills internally or with consultants or reinsurance partners having these strengths. Also needed: good procedures to monitor mortality and persistency experience.

Financial management and accounting for term and UL with secondary guarantees have increased in complexity in recent years, reducing the amount of reserves needed and in turn premium rates.

Traditionally, reinsurance has been used to reduce reserves and surplus strain. Companies have been using letters of credit either through external reinsurance or more recently through internal reinsurance as a way to reduce the capital expense. But lately, large companies have been securitizing large blocks of term insurance to reduce term reserves. While this process is becoming more efficient, significant expense and time is still involved in implementation.

Meanwhile, many direct writers have relied less upon teaming with reinsurers, preferring to retain more risk themselves.

Along with life insurance reserves, mortality rates have been under increased scrutiny in recent years, especially for older age mortality. Insurers and reinsurers are trying to become more comfortable with death benefits they should expect to pay at ages above 70. There has not been much experience at these ages, especially at the higher issue ages. Consequently, insurers are expending more effort to understand how much to discount their expected mortality due to underwriting.

In fact, some are re-examining the nature of underwriting at these ages. Experience from the long term care insurance world indicates that physical or mental functional tests may prove to be better predictors of mortality at these ages than traditional life underwriting tools such as blood tests. The combination of an aging population and insurer recognition of the changing market (as in higher maximum issue ages on life policies) has increased the need for understanding older age mortality.

Mortality rates also are being more closely reviewed for preferred classes. The Society of Actuaries is undertaking a study that will categorize insurance policies into a lineup of preferred and standard nonsmoker categories much as in the early 1980s with nonsmoker and smoker rates. In the meantime, many insurers and consultants have been examining experience, the slope of mortality and the value of modern underwriting tools into later durations. Sentiment is growing that the slope of the 2001 Valuation Basic Table (the basis for the 2001 CSO table) is too steep and is not representative of mortality slopes that can be expected in the future.