Hybrid ‘Term-UL’: Heart Of Life Insurers’ Debate

The newer hybrid term-universal life policies sold by insurers including Genworth Financial and Protective Life are at the heart of the debate surrounding the controversial Actuarial Guideline 38.

Companies such as Genworth (NYSE: GNW) developed term-UL to get out from under the Regulation XXX reserve regime, which covers certain term life policies, and move into the AG 38 reserve regime, which is used to determine the statutory reserves life insurers must hold to support their universal life insurance policies with a secondary death benefit guarantee.

The interpretation of this guideline allowed for less redundant reserves, said Steven Schwartz, an equity analyst with Raymond James, who dubbed the development of term-UL "ingenious."

Term-UL is filed as a UL product but doesn't have the same reserve requirements as term life. The policy automatically converts into a permanent policy down the road. Term-UL offers a secondary death benefit guarantee but no lifetime guarantee, and at the end of the term period, carriers could offer this option, LIMRA said.

UL with secondary guarantees is less expensive than whole life policies but have lower cash values. Insurers are required to maintain a shadow account in case a policyholder's cash value falls below zero.

Redundant reserves were the by-product of Regulation XXX since it was developed by the National Association of Insurance Commissioners over 10 years ago, said George Hansen, actuary and managing senior financial analyst at A.M. Best Co. Amendments to Regulation XXX have been implemented to accommodate the newer UL products with secondary guarantees in AG 38.

Billions of dollars in reserves are at issue depending on the ultimate resolution of AG 38. Holding redundant reserves reduces capital, which limits funds available for share repurchase or acquisitions -- hurting earnings, said Schwartz. Term-UL results in less redundant reserves, and can be priced lower than a traditional term policy, he said.

Reserves required for XXX and AG 38 have been categorized as redundant based on their magnitude compared to reserves based on current assumptions, said Hansen.

Term-UL products are similar to UL policies with secondary guarantees, particularly with their use of "multiple shadow accounts," several experts agreed, but others maintain UL with secondary guarantees are much different than term-UL. Lincoln National, Genworth and Protective also sell UL with secondary guarantees.

In an October letter to Leslie Jones, chair of the Life Actuarial Task Force and deputy director and chief actuary at the South Carolina Department of Insurance, Ohio National Financial Services wrote that some companies do use multiple shadow account designs to artificially increase valuation premiums to lower statutory reserves. "Specifically, our concerns relate to recently introduced term UL products that provide term-like guarantees on a universal life secondary guarantee chassis with multiple shadow accounts."

Ohio National also wrote that current discussions on term-UL reserving practices "has spilled over into a discussion of reserving practices" of companies selling UL with secondary guarantees with multiple shadow accounts. Ohio National urged the task force to bifurcate the two issues.

"Companies selling term UL advertise it as term insurance, and it appears side-by-side with traditional term products in term comparison websites," Ohio National wrote.

In its letter to Jones, however, Genworth wrote: "Clearly, shadow account products have grown in popularity and this promotes affordable life insurance, meeting the needs of a growing number of middle-market consumers. Increasing uncertainty about the reserving requirements for these products, based on reinterpretations of reserving formulas rather than real demonstrated concerns about reserve adequacy, has the potential of reversing this development." The result could be higher premiums, Genworth said.

In addition to Genworth and Protective, others selling term-UL are Lincoln National and Transamerica Life Insurance Co, according to LIMRA. Lincoln, however, said it does not offer a term UL product. Recently, Lincoln asked LIMRA to re-evaluate how their product is categorized.

A.M. Best has observed some life companies are emphasizing the hybrid term-UL product instead of traditional XXX term life, which has contributed to recent industry reports of declining term life sales and increasing UL sales, said Bob Adams, senior financial analyst at A.M. Best Co.

Last month, the NAIC Life Actuarial Task Force signed off on an amended version of a statement about how AG 38 should be interpreted. Its original language said "some companies are holding reserves for universal life insurance products with shadow account secondary guarantees that do not fully reflect the benefits of the secondary guarantees as required pursuant to the NAIC model laws, regulations and actuarial guidelines."

Life insurance trade organizations criticized the statement because they said it accuses some insurers that offer those products of exploiting regulatory loopholes to get away with holding reserves at levels that fail to meet statutory minimums. Soon after, its executive committee opted to create a joint working group comprised of members of the Life Insurance and Annuities Committee and the Financial Condition Committee (Best's News Service, Nov. 5, 2011).

The American Council of Life Insurers supports solutions to AG 38 "that get to level competitive playing fields for all products across all states," said ACLI Whit Cornman in an email. The NAIC is completing an impact study on the current principles-based reserve proposal to gauge its effects on term, term UL and UL with secondary guarantee products, Cornman said. "Once completed, we hope that the study will help set a path toward final implementation of PBR," which ACLI has supported.

Some think of term-UL "as 100-year term policies," said Ernst Csiszar, former insurance director of South Carolina and a former president of the NAIC. "In reality, they're still simply universal life secondary guarantee policies," said Csiszar, a professor of risk management at the University of South Carolina.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])