Just a few years ago, January 1, 2022 to be precise, your company had to update all of its whole life products because the nonforfeiture interest rate was decreasing. A year prior to that, it had to update all of its reserve factors because the valuation interest rate was decreasing. Now, these rates are going back up. What does it mean for your company or fraternal benefit society now?
It means opportunity – opportunity to provide more value to customers, and opportunity to grab more market share – if you’re willing to put in the effort to update your products.
Here’s why the valuation and nonforfeiture rates are changing. For life insurance products, statutory reserves and cash values are calculated using mortality tables and interest rates that are prescribed by state regulations that are based on the NAIC Standard Valuation Law and the NAIC Standard Nonforfeiture Law. The laws specify formulas for how the rates are to be calculated. Because interest rates in general have increased over the past two years, based on the formulas in these laws, the valuation and nonforfeiture rates are going up effective January 1, 2025.
This means that for contracts issued in 2025 and likely beyond, insurers have the opportunity (but not the obligation) to reduce the reserve and cash value scales on their traditional life insurance products.
Let’s unpack that, because this creates three possible approaches for your company to take. Each option involves more work than the prior one, but each creates more opportunity for your company to grow sales and profits.
Option 1: Do Nothing
Your company can continue to sell the same products as you currently do, using the existing reserve tables and cash value tables. That’s because it’s not illegal to have higher reserves and cash values than the laws allow. But because you will be less competitive and will be holding higher reserves than are necessary, this option only makes sense if you don’t care about your life insurance sales volumes or profits. In other words, it only makes sense if your life insurance sales are minimal, and you plan to keep them that way.
Option 2: Lower Reserves
Your company can continue to sell the same products as you currently do, using the existing cash value tables, but you can take advantage of lowering your reserves in order to increase your profits. While reserves for contracts issued in 2024 use the 2017 CSO mortality table and a 3% valuation interest rate, reserves for contracts issued in 2025 can use the 2017 CSO mortality table and a 3.5% valuation interest rate.
This should be an easy implementation. If you compute your own reserves, chances are your company already has tables programmed in the admin system to handle 3.5% reserves, because those tables were used as recently as 2020. If not, your actuary can supply them to you. And you can implement those tables without any regulatory filing with the states or the Interstate Insurance Compact.
This option absolutely makes sense for term insurance, since term has no cash values.
As for whole life, this option makes sense if you want the whole life sales you make to be more profitable. Unfortunately, however, you can expect your sales volume to decline, because companies that care about growing their whole life sales will certainly choose Option 3.
Option 3: Lower Premiums, Cash Values, and Reserves
Because the change in valuation and nonforfeiture rates allows your company to decrease both the reserve and cash value scales on your whole life products, it provides the opportunity for you to profitably lower your premium rates, thereby providing more value to customers. Companies that want to grow their sales and profits undoubtedly will do this. And because not every company will, it means more opportunity for the companies that choose to undertake the effort.
To give you an indication of how much your premium rates could decrease, we computed the decrease in the net premium used in computing the cash value scales, changing the nonforfeiture rate from today’s 3.75% rate to next year’s 4.5% rate. The amount of the decrease varies significantly by issue age, as you see below:
Average Decrease in Net Premium by Type of Whole Life Plan | ||||
Issue Age | Single Pay | 10-Pay | 20-Pay | Pay to Age 100 |
0 | 39% | 37% | 35% | 29% |
10 | 35% | 33% | 31% | 25% |
20 | 31% | 28% | 26% | 21% |
30 | 27% | 24% | 22% | 17% |
40 | 22% | 20% | 17% | 13% |
50 | 18% | 15% | 13% | 10% |
60 | 13% | 11% | 8% | 7% |
70 | 9% | 7% | 5% | 4% |
80 | 6% | 3% | 2% | 2% |
Updating your products will require repricing by your actuaries, filing the product with the Interstate Insurance Compact and/or the states, and implementation on your admin system and illustration software. But the work is worthwhile, as it leaves you in the best competitive position to grow your sales and profits going forward.
What About Pre-Need Plans?
Many single-pay pre-need plans have a premium that is very close to $1,000 of premium per $1,000 of coverage, so there’s no competitive pressure to change the premium rates. Nonetheless, decreasing the reserve and cash value scales creates savings for the insurer that can be allocated to things that matter competitively, such as death benefit growth rates and agent commissions. Thus, you can expect some of your competitors to take these steps. As a result, Option 3 very much applies to pre-need plans, even though you’re likely not changing the premium rates.
When to Start
It takes time for pricing, filing, and implementation work. To be ready with updated products on January 1, 2025, companies are starting this work now. We recommend you do the same.
As always, we at Miller & Newberg are available to help you to optimize your products to the current competitive, regulatory, and interest rate environment. Just give us a call at 913-393-2522.