The Rise Of The Variables, Part I

By Steven A. Morelli

The theme of 2021 and beyond might be The Rise of the Variables because of the many pressures on the fixed product side of the business.

The rise would be the return of one giant and an offspring of another.

Timothy Pfeifer of Pfeifer Advisory, which advises carriers on product design, said interest rates, regulations, tax policy and other factors are forcing companies to rethink their whole product lineup.

Pfeifer plans to explore product trends with Donna Megregian, vice president, U.S. Mortality Markets, RGA, during the Life Product Update session on Monday afternoon at the virtual Life Insurance Conference from LIMRA, LOMA and LL Global.

A few of the factors squeezing carriers on fixed products, particularly universal life are:

Interest Rates

Low rates have been confounding not only carriers’ attempts to offer attractive products, but also the basic health of companies.

“Lower interest rates affect everything,” Pfeifer said. “It's created a flurry of transactional activity, with companies selling blocks or selling themselves. It's just a stress point for the industry.”

The most concentrated pressure is on fixed products.

“Companies want to get out of certain interest rate-sensitive businesses,” Pfeifer said. “Even for term insurance, which is the least interest rate-sensitive of all the main product types.”

Actuarial Guideline 49A

The National Association of Insurance Commissioners’ indexed universal life illustration rule update AG 49A has upended IUL product design and marketing.

AG 49A does not allow a product with a bonus or multiplier to illustrate projections more favorably than a product without bonuses or multipliers, effectively removing their value from the products.

Carriers have responded by pulling products, reducing illustrated values or offering supplemental marketing material, Pfeifer said.

“These supplemental marketing pieces are not individualized in any way,” Pfeifer said. “They're not looking at your actual age or your risk class or anything. They are genericized. Because they're not individualized, they don't meet the definition of an illustration.”

But generally, the rule blunted the value of the multiplier because its impact could not be illustrated directly in the consumer’s case. So, the multiplier still had an impact on the product’s cost, but the producer could not demonstrate its value in an illustration.

“The whole multiplier part of it was a really important part of the design,” Pfeifer said. “The product was really built on that foundation, the way the product loads were built. Everything was centered on this ability to leverage the multiplier. Companies that decided that the multiplier was not really where they wanted to go have largely pulled the entire product as opposed to just building the multiplier piece out of it.”

IRS 7702 Changes

The second pandemic relief bill passed late last year changed the IRS Rule 7702 minimum interest rate required on cash value. The rule was originally designed to keep cash value at a certain level below the face value to consider it life insurance, rather than purely an investment vehicle.

The rate can now float in relation to actual market rates, but it had remained unchanged since 1984, despite near-zero interest rates of the past several years.

“That interest rate was basically hard-coded into the tax code,” Pfeifer said. “The net effect is that people could put less money into their contracts, or set another way, they could accumulate less money, before violating the definition of life insurance. The industry was at a disadvantage, because people couldn't put in as much money.”

The new rule means consumers can put more dollars into their cash value insurance, but they will also see less face value. Lower face value also means that producers will get less commission, unless companies change the compensation structure.

“This has a bunch of product design implications and profitability implications,” Pfeifer said. “So, the jury is still out on how companies are going to respond to this.”

Carriers are scrambling to reprice products and recode systems because the rule went into effect on Jan. 1, despite industry requests to postpone the effective date until July.

Tomorrow: We look at how these industry pressures are giving rise to new product designs.

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.