Insurers Ponder Product Design Amid New Reserve/Mortality Regs

By John Hilton

The new year brought the culmination of a long, technical, behind-the-scenes effort to update insurers' reserving processes and mortality tables.

On Jan. 1, the 2017 Principle-Based Reserving and Commissioners Standard Ordinary Table both took effect. Insurers had three years to meet the new standards, but some were certainly more prepared than others, one actuarial expert said.

While the changes are of the technical variety being done on the actuarial side of the business, the impact could trickle down to the product variety and availability, said Tim Pfeifer, a 35-year veteran of financial services and president of Pfeifer Advisory.

"I think there will be less, or at least a slower rollout of innovative features," Pfeifer said. "If you're a company thinking about developing a long-term care rider feature on a life product, you have to face this issue of, there's really no good defined way as to how we do this. And so what if we do it and it's wrong?"

Principle-Based Reserving

Principle-based reserving, or PBR, is merely a modeled approach to statutory reserves. Canada and some European countries previously moved from formula-based reserving to PBR. The old way proved ineffective once insurers began developing more complex product designs, Pfeifer explained.

"Each time the industry would develop a new product, the regulators would kind of scramble - with the assistance of the industry, of course - but they would scramble to try to figure out the best way to reserve for them," he said. "And then you came up with these features called no-lapse guarantees that created another wrinkle, and the regulators perceived that some companies were taking advantage of the existing reserving rules."

In particular, defenders say PBR represents an improvement by making reserving specific to a carriers’ own mortality, lapse and investment experience, rather than the prior approach where all carriers used the same standard formula.

The National Association of Insurance Commissioners adopted PBR standards in June 2016. At the time, Fitch Ratings forecast that "level-premium term and universal life insurance with secondary guarantees are expected to be most affected."

Fitch expected that large insurers would be more able to adopt PBR, "particularly those that write significant amounts of term insurance while UL-focused companies will likely move more slowly."

"That's been sort of a strategic decision point for carriers as to what parts of their portfolios they want to start moving to PBR before the deadline," Pfeifer noted.

The entire PBR migration has likely been at substantial cost to insurers, he added.

"They've had to really strengthen their modeling capabilities," Pfeifer said. "They've had to buy new actuarial software. They've had to hire new people, especially if you're a large company. This is just a massive, massive effort and companies were encouraged to start early and some of them did and some of them didn't."

Mortality Tables

The CSO table is used for calculating a policy’s minimum cash value, statutory reserves, and minimum death benefit to premium ratio for the policy to be considered life insurance. The previous CSO was from 2001.

Mortality rates are generally improved in the new 2017 table, but that is just one factor in product pricing. Insurers are alerting agents to possible changes arising from the new CSO tables.

For example, one insurer noted that policies designed to maximize cash value growth are likely to be less efficient because the maximum premium that can be paid per dollar of death benefit is lower.

The CSO means a retooling of all products, Pfeifer explained.

"And usually when companies retool their products, they take the time to make them more or less competitive or add new features," he added. "So all of these things have created a big product development effort at many companies."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.