Category: Insurance

A Framework for Defining a Role for Insurers in “Uninsurable” Risks: Insights from COVID-19

Mary Pat Campbell

Link: https://content.naic.org/sites/default/files/JIR-ZA-40-10-EL.pdf

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RETHINKING UNINSURABILITY While many have viewed insurability as a binary choice with respect to a risk (i.e., insurable or uninsurable), insurability is more appropriately considered on a continuum, ranging from easy-to-insure, such as automobile or life insurance, to difficult-to-insure, such as pandemic, loss of the electrical grid, and other extreme catastrophic risks.

FRAMEWORK The role of private and public sectors in dealing with risks that are difficult-to-insure should be to develop strategies that enable a greater degree of insurability. To do so, the framework suggests that policymakers consider three fundamental options in dealing with the insurance industry:

Status Quo (SQ) –This option (SQ) contemplates a similar dynamic to that experienced with COVID-19, wherein businesses, nonprofits, and local governments found limited (if any) insurance coverage for their losses and ex post relief programs funded by the government.

Service Provider (SP) – This option (SP) contemplates an administrative, non-risk-bearing role for the insurance industry while the entire cost of claims would be publicly financed.

Service and Risk (SR) –In addition to its role as a service provider as characterized by SP, this option (SR) would expect insurers to commit capital – in an amount that does not threaten their financial viability – to cover a specified layer or other defined element of losses.

Author(s): Howard Kunreuther, Jason Schupp

Publication Date: 2021

Publication Site: NAIC

Aggregate Lapsation Risk

Mary Pat Campbell

Link: https://www.nber.org/papers/w30187

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Abstract:

We study aggregate lapsation risk in the life insurance sector. We construct two lapsation risk factors that explain a large fraction of the common variation in lapse rates of the 30 largest life insurance companies. The first is a cyclical factor that is positively correlated with credit spreads and unemployment, while the second factor is a trend factor that correlates with the level of interest rates. Using a novel policy-level database from a large life insurer, we examine the heterogeneity in risk factor exposures based on policy and policyholder characteristics. Young policyholders with higher health risk in low-income areas are more likely to lapse their policies during economic downturns. We explore the implications for hedging and valuation of life insurance contracts. Ignoring aggregate lapsation risk results in mispricing of life insurance policies. The calibrated model points to overpricing on average. In the cross-section, young, low-income, and high-health risk households face higher effective mark-ups than the old, high-income, and healthy.

Author(s): Ralph S. J. Koijen, Hae Kang Lee & Stijn Van Nieuwerburgh

WORKING PAPER 30187
DOI 10.3386/w30187

Publication Date: July 2022

Publication Site: NBER

USAA Customers Have a Strong Grip on Their Life Policies: Researchers

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/07/13/usaa-customers-have-a-strong-grip-on-their-life-policies-researchers/

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USAA — a policyholder-owned insurer that has historically focused on serving military veterans and their relatives — may be the big U.S. life insurer with the lowest policy lapse rate.

A team of researchers led by Ralph S.J. Koijen has presented data supporting that conclusion in a new analysis of how economic slumps affect which insureds drop their life insurance.

To conduct that analysis, the Koijen team crunched data from the public financial reports of the 30 biggest U.S. life insurer groups, for a period from 1996 through 2020.

….

Overall, a severe crisis, such as the 2007-2009 Great Recession, might increase a company’s life policy lapse rate by about 1 percentage point or more, after holding other factors considered equal, the researchers concluded.

The researchers found that, after holding factors such as risk class, smoking use and type of coverage equal, being under age 35 increased the risk of letting a life policy lapse by 46%, and being ages 25 through 34 during an economic slump increase lapse risk by an additional 15%.

Author(s): Allison Bell

Publication Date: 13 July 2022

Publication Site: Think Advisor

Mid-Year 2022 Capital Markets Update

Mary Pat Campbell

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-mid-year-2022-update.pdf

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The shape of the Treasury yield curve generally provides insight into the market’s expectations for
interest rates, as well as economic activity. As of June, the yield curve has shifted higher and flattened
compared to the beginning of the year and the last year. The Federal Reserve’s recent aggressive actions
have resulted in the higher Treasury rates and a flattening of the yield curve, as many investors believe
higher rates will push the U.S. economy into a recession. The yield curve also inverted briefly in midJune, which market participants view as a recession signal.

As of year-end 2021, U.S. insurers had exposure to about $316.3 billion in U.S. government bonds across
various maturities, or about 6% of total cash and invested assets. This was an increase from $280.6
billion at year-end 2020, but it was unchanged as a percentage of total cash and invested assets.

Author(s): Jennifer Johnson and Michele Wong

Publication Date: 23 June 2022

Publication Site: NAIC Capital Markets Special Report

Accelerated Death Benefit Rider Financing Approaches

Mary Pat Campbell

Link: https://www.soa.org/sections/product-dev/product-dev-newsletter/2022/june/pm-2022-06-scholz-eaton/

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Living benefit riders to life insurance policies (also known as ‘combo’ or ‘hybrid’ policies) have become a core component of life insurance sales strategy. LIMRA reported that in 2020 “Combination products represented 24 percent of life insurance sales based on total premium.”[1] Concurrently, the long-term care insurance (LTCI) industry reached an inflection point when more LTCI (and chronic illness) benefits were sold through hybrid products than from standalone LTCI coverage.

On the spectrum of life and LTCI hybrid policies, the richest of these provide coverage of LTCI first through accelerating the policy’s death benefit, and then by providing extended LTCI benefits for many more years. There are a handful of individual and worksite insurers who sell these rich hybrid policies. On the other end of this spectrum are acceleration-only riders to life insurance policies. These riders provide policyholders the opportunity to receive a portion of the policy’s death benefit in advance, under certain conditions. Some of these riders do not cover qualified LTCI, but instead cover ‘chronic illness,’ which has a similar benefit trigger but is not formally LTCI.

This article outlines industry practice and consideration for pricing these acceleration-only policies. The National Association of Insurance Commissioners (NAIC) Model Regulation #620 addresses accelerated death benefit riders to life insurance policies.[2] Model Regulation #620 outlines three financing methods for accelerated death benefit riders which we describe in this article. The Interstate Insurance Product Regulation Commission (the IIPRC, or the “Compact”) adopted standards for some of these riders in the Additional Standards for Accelerated Death Benefits (IIPRC-L-08-LB-I-AD-3).[3] For companies filing chronic illness, critical illness, and terminal illness products in the Compact, these standards define—among other items—the form and actuarial submission requirements and benefit design options for accelerated death benefit riders. If a company is filing an acceleration rider for a qualified LTCI benefit, that product would be subject to the IIPRC individual LTC insurance standards.

Author(s): Stephanie Scholz and Robert Eaton

Publication Date: June 2022

Publication Site: Product Matters!, SOA

Life Insurance Has an Inclusivity Problem

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/10/life-insurance-has-an-inclusivity-problem/

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Modern underwriting approaches and distribution methods, often spearheaded by insurtech companies, unlock unique, data-driven insights that enable the industry to understand who they’re serving well — and where they fall short.

The industry can use these insights to adopt a more personalized, progressive approach to product design, underwriting, and distribution to reach specific populations with coverage options and pricing that suits their unique needs.

For the LGBTQ+ community, historical rules and underwriting approaches around mental health could make coverage unattainable or unaffordable.

For example, while our survey didn’t ask respondents about treatment for mental health, the cost of health care in general was a primary concern for nearly 70% of respondents.

A study published in the National Library of Medicine found that LGBTQ+ people used mental health services at 2.5 times higher rates than heterosexual or cisgender individuals.

Additionally, studies have found that they are two and a half times more likely to experience depression, anxiety, and substance abuse — items that are all considered in the underwriting process for life insurance.

Since many in the LGBTQ+ community struggle with mental health concerns, we must find better ways to understand the situation and evaluate the risk holistically.

Author(s): Jeremy Bill

Publication Date: 10 Jun 2022

Publication Site: Think Advisor

Was ‘The Staircase’ murder really about life insurance?

Mary Pat Campbell

Link: https://www.policygenius.com/life-insurance/news/staircase-michael-peterson/

Excerpt:

It’s been 21 years since novelist Michael Peterson was on trial for the murder of his wife, Kathleen, but the case is still capturing the public’s attention—most recently in an HBO Max series, “The Staircase.”

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The case also involved the potential for a large life insurance payout. Kathleen had a $1.4 million life insurance policy, which was due to be paid to Michael in the event of her death. Prosecutors said Peterson was hoping to use the payout to address his debt [1] , including $143,000 in credit card debt.

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Peterson signed away any claim to the life insurance proceeds during the trial. However, because of the slayer rule, Peterson wouldn’t have been able to collect any money. Under the slayer rule, anyone suspected of murder or plotting a murder is prevented from benefiting from the dead person’s life insurance policy. Instead, Kathleen’s biological daughter, Caitlin Atwater, and her daughter’s father, Fred Atwater, received the money. [2]

In the scope of insurance fraud, life insurance murders aren’t a huge occurrence but they do happen, says Matthew J. Smith, executive director of the Coalition Against Insurance Fraud. For instance, in 2017, Joaquin Shadow Rams Sr., was convicted of killing his 15-month-old son for insurance money. Rams had taken out a $500,000 life insurance policy on the boy soon after he was born, which Smith says, should have been a red flag. 

Author(s): Lisa Rabasca Roepe

Publication Date: accessed 18 June 2022

Publication Site: Policygenius

5 Ways the New Stock Market Rollercoaster Could Affect Life Insurers

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/16/5-ways-the-new-stock-market-rollercoaster-could-affect-life-insurers/

Excerpt:

1. Clients could swarm on life and annuity products with benefits guarantees like ants on a candy bar that fell under the picnic table.

Sales of products such as non-variable indexed annuities and non-variable indexed universal life insurance policies soar, as clients flocks to arrangements that can protect them against further drops in stock prices but help them share in gains if and when prices go back up.

Author(s): Allison Bell

Publication Date: 16 June 2022

Publication Site: Think Advisor

South Carolina Withdraws From Interstate Insurance Compact

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/13/south-carolina-withdraws-from-interstate-insurance-compact/

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South Carolina — one of the leaders in the effort to create the Interstate Insurance Product Regulation Compact — has withdrawn from the compact because of a conflict over long-term care insurance rate increase application reviews.

Members of the Interstate Insurance Product Regulation Commission, the body that oversees the compact, voted in December 2021 to keep a rule that lets the compact review and approve requests for LTCI rate increases under 15%.

The rule conflicts with a new South Carolina law that requires the director of the South Carolina Department of Insurance or a director designee to review and rule on all LTCI rate filings.

Author(s): Allison Bell

Publication Date: 13 June 2022

Publication Site: Think Advisor

NAIC Rejects Need for Federal Help With Private Equity-Owned Life Insurers

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/02/naic-rejects-need-for-federal-help-with-private-equity-owned-life-insurers/

Excerpt:

State regulators are not seeking help from Washington with monitoring those private equity firm owners, the officers of the National Association of Insurance Commissioners wrote in a public letter sent to Brown earlier this week.

Brown is the chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee.

The NAIC officers told Brown that U.S. life insurers have been writing complicated products and using large, complicated investment strategies for some time.

“Our system has experience at assessing and understanding this dynamic through market highs and lows,” the regulators said. “State insurance regulators are fully capable of assessing and managing the risks of these insurers, and there is nothing PE firms add to the playing field that changes this fact.

Author(s): Allison Bell

Publication Date: 2 June 2022

Publication Site: Think Advisor