Interview with Tony Steuer on Life Insurance’s Changing Landscape

Thanks to Ingrid Case for her interview on changes in the life insurance landscape that appeared in the September 2011 issue of Benefits Selling. The following is an excerpt and the complete article can be read at:

In an economic downturn, you would put a priority on paying for a) food, b) housing, or c) life insurance? If you chose c, you’re not like most Americans. Recent economic stress has driven life insurance ownership to very low levels, says Todd Katz, executive vice president for insurance products at New York-based MetLife. According to a recent MetLife study of employee benefit trends, 30 percent of American households have no life insurance coverage at all, and the average U.S. household owns enough life insurance to replace just 3.6 years of income.

Stressed companies move prices higher – Insurance companies are under stress, too.

“I think the companies are still feeling the impact of the economic downturn, and that’s showing up in financial strength ratings,” says Tony Steuer, a life insurance analyst in Alameda, Calif. Insurance companies are typically restricted to investing premium dollars in highly rated debt instruments. As a result, the insurance industry is heavily invested in Treasury bills and related U.S. government securities, and is vulnerable to the specter of a U.S. government default, which would force down ratings for both U.S. government debt and insurance companies themselves. “The fear is that, long-term, the insurance industry is on a negative ratings trend,” Steuer says. “There’s a concern about how solid the industry will be in the future. That’s not yet showing up in pricing, but it may.”

Historically low interest rates, on the other hand, are currently affecting some life insurance pricing. Insurance product pricing is based on predicted costs of insurance, lapse rates and investment returns, so policy performance suffers when rates of return are lower than predicted. Universal life policies have been hit hardest by lower returns, Steuer says, but other policies are affected as well.

At the same time that insurance policies as a group have suffered from low investment returns, variable and equity policy returns have been hurt by stock market underperformance. “Some companies have minimum payouts, and lower interest rates mean that they have to make up the profit somewhere,” Steuer says.

Insurance firms have also felt pressure from a trend toward policyholders selling their policies on the life settlement marketplace. Third-party purchasers almost keep the policies they buy in force, and that skews lapse rates upward, a change that also costs insurance companies deep in the pockets. “That impacts the pricing across the board,” Steuer says.

Something’s got to give, and that something is typically either premium level or term length. “Some companies have sent out ‘heads up’ letters asking clients what they want to do, but the industry doesn’t generally give heads up about underperforming policies. Some people are going to have a lot of unpleasant surprises,” Steuer says. They may either pay higher premiums or see policies terminate prematurely, a choice that only increases their financial stress.

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