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Winning BIG With Guarantees

Winning BIG With Guarantees. But Not Everything is Golden. The Birth of Guarantees…. In the 1990’s no-lapse secondary guarantees were created to… Jumpstart a stagnant UL life product market Accommodate consumers’ growing need for security

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Winning BIG With Guarantees

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  1. Winning BIG With Guarantees But Not Everything is Golden

  2. The Birth of Guarantees…. • In the 1990’s no-lapse secondary guarantees were created to… • Jumpstart a stagnant UL life product market • Accommodate consumers’ growing need for security • Adjust to a rising economy coupled with bear stock market

  3. What is the Debate About? • Carriers competing, sometimes with alleged overly aggressive pricing/ assumptions • Exaggerated possibility circulated by carriers not in this market who predict the downfall of any carrier marketing no-lapse products • Ratings agencies and industry watchdogs heightening the concern

  4. Purpose of the Product • Estate Planning • Works in Pension Max • Table 4 term (best with 20 yr) table shave • Term to 100

  5. Examining No-Lapse Products • Guaranteed death benefit • Specified minimum premium that will guarantee death benefit • Minimal cash value • Not comparable to a savings account

  6. Understanding the Product • Impact of policy modifications • UL policy overall • UL no lapse specifically • Policy loans • face amount • Switching DB option • Rider additions • Reinstatement provisions • Catch up provisions

  7. One cannot buy a refrigerator and expect it to bake a cake!

  8. Solvency Issues • Aggressive pricing assumptions • Portfolio yield • Lapse rates • Mortality rates

  9. Regulator Response (NAIC) • More stringent NAIC testing guidelines • “Our pricing assumptions, including lapse assumptions are considered proprietary in nature. That being said, all of our universal life products, including LPR secondary guarantee products, meet the requirements of the National Association of Insurance Commissioners (NAIC) illustration testing (under which one test assumes no lapses after 5 years)” • -Andrew Niedzielski, VP, Fixed Life Business Lincoln Financial Group

  10. Regulator Response (AXXX) • Guideline AXXX specifically calls for companies selling no-lapse guarantees to establish reserve requirements using a mortality table and interest rates considerably lower than pricing and using a zero lapse assumption • On the other hand, Moody’s describes a set-up of 7% yields, 6% lapse rates and 100% mortality as “good”

  11. Regulator Response • Why the discrepancy between guideline AXXX’s zero lapse rate and Moody’s 6% lapse rate? • Ben Wolzenski, President, Actuarial Collaboration, notes, “That is because the assumptions required in statutory reserve calculations are conservative. This reflects the fact that the state regulatory authorities’ primary duty is to ensure the solvency of insurance companies, not to facilitate lower prices for consumers. So a carrier might well assume, realistically, that there will be some lapses.”

  12. XXX/AXXX Regulations • Regulation XXX added reserving requirements to level term life insurance programs. • Actuarial Guideline AXXX (effective 1/1/03), which increased the reserving basis on universal life policies with long-term secondary guarantees. (See tabs entitled “XXX/AXXX An Explanation”)

  13. Industry Response • Letters of Credit (LOC) • Ongoing analysis and refinement • Price adjustments • Capital market solutions • Moody’s states that, “there will be more capital market solutions developed in order to help companies meet the requirements.”

  14. Carrier Wherewithal • Specific comments of rating agencies (See tab entitled “Carrier Rating Reports”)

  15. Fitch Ratings on AXA • “The rating outlook for AXA is stable. Fitch ratings expects AXF (stock market symbol) to further strengthen its operating earnings due to pricing and expense controls. Despite strong growth, risk-based capital is expected to remain above 300% going forward, and leverage is expected to remain below 25%. Fitch believes the subsidiaries of AXA/AXF will continue to receive parental support in order to facilitate acquisition or maintain the company’s current financial/ ratings position.”

  16. Moody’s on John Hancock • “John Hancock has one of the most carefully managed books of business in the industry and keeps its non-credit risk profile (liquidity, rollover/refinance, and interest rate risks) within tight pre-established tolerances.”

  17. Moody’s Manulife Report: • ““Manulife sells universal life products which have long-term cost-of-insurance (COI) and ‘no-lapse’ guarantees. Regulation XXX was designed to make reserving practices for term and universal life insurance products with long-term level premiums more conservative. Regulation AXXX ,which is in effect for 2003, addresses some forms of secondary guarantees found in universal life products not already captured by XXX, including those products with ‘no lapse’ guarantees. As is the case for many U.S. insurers offering these products, we expect there will be some impact on the company’s U.S. statutory results, but that on consolidated Canadian GAAP basis there should be no impact {emphasis added}”

  18. Overall review • Revealed no definitive negative comments on other insurance carriers

  19. Validity of Individual Rating Reports • Expression of opinions based on variable assumptions • Predictions, not certainty

  20. Due diligence • Historical financials • Current ratings • Investment diversification • Market focus • Guarantee is only as good as the company offering it

  21. We Have Reassurances: • Head pricing actuary must comply with NAIC standards to follow guidelines or face fines; insurance co. can lose credentials • Even IF…pricing were to not meet all AXXX criteria, worst case scenario, insurance companies make lower profits, not necessarily become insolvent • Lapse assumption pricing concerns have been addressed through NAIC guidelines under AXXX; however products including no-lapse are still being projected to stay on a company’s books for an average of 8-10 years

  22. Fiduciary Responsibilities • Annual reviews • Education • Ethical selling and placement • If selling a company with 30 day reinstatement window, be sure to request the company sends billing 60-90 days before due dates (See tab entitled “Life Insurance Review”)

  23. Case Study #1 A Few Case Studies… • Husband and wife (ages 71/68) bought 4 SUL policies 1992-1996 • Purpose was estate liquidity • Total premiums = $260,374 • Total cash value = $147,694 • $10M death benefit total • Both husband and wife issued standard

  24. Case Study #1 Review revealed clients… • Wanted cash value in policy in case estate tax repealed • Would like to lower gifts to trust • Could qualify for preferred non-smoking rate • Some policies would lapse soon without increased premium

  25. Case Study #1 Action Proposed • 1035 all 4 policies into $10M secondary guaranteed UL product • Results • Lower annual premiums to $194,345 (reduced from $260,374) • Client saves $66,029 per year • Cash surrender value on current non-guaranteed factors= $1,052,087

  26. Case Study #2 Loan Rollover • Male, age 70, $500,000 Face Existing Policy • Gross Cash Value= $247,318 • Outstanding Loan=$110,576 • In-force projection: Lapses in 7 years at age 77 on current factors • 1035 Exchange into a secondary guaranteed loan rollover product

  27. Case Study #2 Loan Rollover • Result: • Loan not repaid; loan interest charged= policy crediting rate on loaned cash value • No further planned premiums • $500,000 death benefit; db at issue net of loan= $389,424 • Even with loan outstanding, policy stays in force until age 110 on a guaranteed basis

  28. Case Study #3 Jumbo Loan Rollover • Male, age 66, SNT, $75M face policy, $25M CV • $12.5M outstanding loan • Policy reprojections show lapse within 5 years on current factors • Goals: avoid “phantom income” and maintain net level db of $62.5M • 1035 into guaranteed product, no loan repayment

  29. Case Study #3 Jumbo Loan Rollover • Results • Maintained guaranteed net level db of $62.5 • No phantom income with guaranteed db • Annual cash outlay to keep guaranteed level death benefit at $62.5M ($75M – 12.5M)= $1,003,959 (premium + loan interest)

  30. David W. Simbro, FSA,Northwestern Mutual • “Will the rebirth of fixed life products via UL/SG work financially for insurance companies: Insurance companies are paid to take risks. Whether the prices they charge are sufficient for the risks they take can only be known over time, as experience unfolds.”

  31. Moody’s Special Comments - July 2004 • “We believe that long-term winners in this market will have a full understanding of their exposure to secondary guarantees, will exhibit pricing discipline and will have addressed the potential problem of reserve strain well ahead of the time it could become an issue for the company.” For individual company product information see tab entitled “Company Product Information”

  32. NLG vs. Current Scenario Valued Male, Age 45 Preferred Non-Smoker DB $1,000,000

  33. NLG vs. Current Scenario Valued Male, Age 45 Standard Non-Smoker DB $1,000,000

  34. NLG vs. Current Scenario Valued Male, Age 55 Preferred Non-Smoker DB $1,000,000

  35. NLG vs. Current Scenario Valued Male, Age 55 Standard Non-Smoker DB $1,000,000

  36. Baker Associates • For more information contact our sales staff: • Email us at: info@bakco.com • Call us at: 1-888-899-6599 • www.bakco.com

  37. One Final Thought… • Why are the companies that are raising the red flags not carrying no-lapse products? Thank you Baker Associates 7502 E Pinnacle Peak Rd, Ste 116B Scottsdale, AZ 85255

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