Also in this issue:
Group Company Myopia
Employer Attitudes toward Voluntary during the Recession
Tough Economy? It’s Conservation Time
The Product that was Supposed to Have Died!
Are We in the Voluntary Business or the Benefits Business?
Economic Lessons
Managing the Budget in Uncertain Times
Who Will Serve the Micro Group Market?
Return of Premium Term – Implications of a New Actuarial Guideline
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Spring 2009/ No. 79
Return of Premium Term – Implications of a New Actuarial Guideline
By guest contributor Dominique LeBel, Tillinghast
Periodically, we feature articles written by guest contributors. The following article is from our friends at Towers Perrin. Return of Premium term is a product that we have been very interested in over the past few years because of its ability to differentiate itself as a non-commodity product and one that is not sold primarily on price. Towers Perrin has been very active in the Return of Premium term market—both worksite and individual.
Return of Premium (ROP) term is one of the hot products in the worksite market for several reasons:
- It is easy for consumers and producers to understand.
- Sales pitches such as “money-back term,” “did you know that very few policies mature as death claims,” and “win-win: insurance protection if you need it, return of premiums paid if you don’t” resonate with buyers.
- Quoted after-tax rates of return are often higher than alternative investments (e.g.: bank certificates of deposit).
- Additional premium for ROP term translates into more commissions for the producer.
- It works for a variety of strategic sales situations (e.g.: mortgage funding, college funding, alimony funding, key-man, and buy-sell).
But in light of a new actuarial guideline, “AG XLV” (formerly known as AG CCC), there may be an impact on this “hot” product’s premium rates—something for which carriers and producers should be mindful.
AG XLV was adopted in the fall of 2008 by the NAIC. It sets guidelines for minimum cash values for ROP term policy forms filed after December 31, 2008 and policies issued after December 31, 2009. Under AG XLV, cash values prior to the end of the level term period will generally need to be increased for most current ROP term products (for some products, current cash values at certain durations could be decreased, but overall, cash values under AG XLV are generally higher than current cash values). This general increase in cash values will likely necessitate an increase in premium rates. The higher the lapse rates assumed, the greater the impact on premium rates. And, since worksite products generally have higher lapse rates than products sold in other distribution channels, the impact on worksite ROP term premiums may be significant.
AG XLV will have other consequences:
- It will cause ROP term products to have cash values that vary by underwriting class (i.e., by issue age, smoking class, etc.).
- It will make it easier to have these products available in all states (interpretation of the Standard Non-forfeiture Law used to make it difficult to get ROP term policy forms approved in all states).
- It will eliminate the benefits obtained from ROP rider and indeterminate designs. As a result, fully guaranteed integrated designs may replace these designs.
Dominique LeBel, FSA, MAAA, FCIA, is a Senior Consultant for Towers Perrin. He can be reached at (415) 836-1081 or dominique.lebel@towersperrin.com.
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