Heard In The Hallways – LIMRA Life Insurance Conference

Question: If interest rates begin to go up this year, what if anything will happen to life insurance product design and pricing? Why?

 “If rates rise this year, the industry will watch and it will respond appropriately, in a conservative manner. But a response probably would not happen until at least next year. The fixed annuity line would be the first to respond, followed by life insurance. That’s because fixed annuity pricing is more responsive to bond markets, and because the products have more competition from other savings instruments such as bank certificates of deposit and bond portfolios. The fixed annuity market also has more durations that are shorter term than does the life insurance market. On the life insurance side, look for universal life insurance policies to respond first because they are interest-sensitive polices; from a competitive perspective, these policies will need to respond. Look for changes in whole life and term insurance product later. But there will be a lag in all of this, even if rates go up very fast. If rates do spike, say in the second half of the year, we’d need to wait for a while to see whether they go back down. And the carriers will need to maintain their hedges against volatility, so they will want to be sure where they are before acting. ‘Conservative optimism’ is the approach the industry will take.

– Kenneth Sutton, life product management director, USAA, San Antonio, Texas

“There will not be a sudden response from the life insurance industry. Hopefully, rates will go up gradually, so the insurance companies will have some time to react. At the mutual insurance companies like ours, we’ve been riding the wave of low interest rates. We pay fairly high dividends bolstered by earnings of our other businesses, such as mutual funds, annuities, BOLI (bank owned life insurance), and corporate owned life insurance (COLI).If rates were to go up fast, it will take time to get new products on the street. The gestation period for product development means that we can’t react with new products right away. For universal life insurance, carriers would almost need to create a new investment portfolio to accommodate the new rates and avoid the drag caused by investments made earlier at lower rates.  It will probably take many carriers about two years to respond, although they’d like it to be shorter.”

– Joel Wolfe, second vice president and actuary, MassMutual, Springfield, Mass.

“A big fear in the industry is that, if rates go up fast, policy lapsation will occur that the companies did not provide for in their pricing. That could happen if existing policyholders decide to leave their policies in order to access higher interest rates available elsewhere.  Actuaries in the BOLI (bank owned life insurance) and COLI (corporate owned life insurance) markets are especially concerned about this. They are aware of the risk of disintermediation that this kind of change could present. There is more concern about interest rate disintermediation in these two markets than in the general individual life insurance marketplace. That’s because the built-in lapse assumptions in the BOLI and COLI markets are much narrower than the lapse assumptions in the general market.”

– Luke VandenAvond, research consultant, Northwestern Mutual, Milwaukee, Wis.