Disintermediation

  • …disintermediation:  That is, the decline of the life insurance industry as a savings medium.
  • Disintermediation occurs:
    • through lapsation,
    • increasing policy loan utilization,
    • the continuing shift towards term insurance
    • as well as a wave of product replacements within the industry itself.
    • It also occurs with a substantial opportunity cost as new savings dollars are being invested in other media.

—  William R. Britton, Jr.

1983 – SOA – Individual Life Insurance, Society of Actuaries – 22p

  • There is a disintermediation risk for carriers when policyholders are educated through updated illustrations when their policies go off track. 

2016 0517 – LIIIWG – Assurity Resources – Consumer Issues Associated with Guaranteed Universal Life – NAIC – 11p

2016-2, 0513 – NAIC Proceedings – LIIIWG, Life Insurance Illustrations Working Group

  • Disintermediation of traditional life insurance is most severe for policies sold as savings instruments.

—  George R. Dinney

1982 – SOA – Programs to Conserve Traditional Life Insurance Policies, Society of Actuaries – 18p

 When a policyholder feels deceived, the disintermediation potential is enhanced.

— Allen D. Booth, FSA, is a consultant in the Milwaukee office of Towers, Perrin, Forster and Crosby. He consults on product management, strategic planning and financial projections. 

1982 – SOA – Universal Life Update , Society of Actuaries (rsa82v8n34) – 26p

  • (p4) – Individual Products
    • The most important feature of the new individual products was the unbundling or separation of the fund accumulation from the mortality function.
    • In this way the consumer could be shown his or her fund and the earnings credited to it as a separate element.
    • Universal life and a variety of variable life and annuity products were the chief vehicles in this effort.
  • (p5) – The key risks for these products were the spread risk and the potential disintermediation risk in the event they were surrendered in response to interest rate changes.
    • Traditional life company management structures were not well suited to managing these risks. (p5)

—  1991 0717 – NAIC Testimony – Terence Lennon, New York Department of Insurance – 17p

1991 0717 and 0724 – GOV (House) – Life Insurance Solvency Issues, (CSPAN) – Insurance Insolvencies, (NAIC) – The Impact of Junk Bonds, Real Estate and Mortgages on the Life Insurance Industry – Cardiss Collins (D-IL)  —   [BonkNote]

  • 1968 0508/0509/0515/0516 – GOV (JEC) – Standards For Guiding Monetary Action – [PDF-319p]
  • 1982 – SOA – Programs to Conserve Traditional Life Insurance Policies, Society of Actuaries – 18p
  • 1983 – SOA – Disintermediation, Investment Strategy and Product Design, Society of Actuaries – 22p
  • We are seeing a real crisis in confidence:
    • That, in my mind, is probably the worst thing that could happen.   
    • There is not a company in the country that can stand runs that Commissioner Weaver was talking about, where people ask for $1 billion in policy loans and surrenders in a 2-week period.  (p13)

—  William McCartney – Director of Insurance, State of Nebraska and Vice President, National Association of Insurance Commissioners (NAIC)

1991 0729 – GOV (House) – Regulation of Insurance Companies and the Role of The National Association of Insurance Commissioners – [PDF-286p, VIDEO-?]

  • A large disintermediation risk can occur when interest rates rise and the market value of assets supporting policies with book value guarantees become materially less than the guaranteed surrender value.
    • One way to eliminate, or reduce, that risk is to offer individual life and annuity products which utilize a market value adjustment formula in determining cash values.
  • However, until 1985, book value cash surrender values were required on individual life and annuity policies in the United States.

1986 – SOA – Market Value Adjusted Products, rsa86v12n33 – Society of Actuaries – 34p

  • Since 1975 there have been drastic changes in economic stability, accompanied by higher interest rates than most of us imagined possible at that time.
    • The changes included rapidly increasing withdrawal rates, decreased market values of assets, and disintermediation.
    • As a part of this new world, there has been increased use of flexible products by life  insurance companies.
    • These products separately identify interest credits and charges for various risks and expenses.

—  Thomas J. Leary

1984 – SOA – Financial Reporting for New Generation Life and Annuity Products, rsa84v10n219 – Society of Actuaries – 22p

  • When we give the liabilities a quick checklist, I would recommend the following:
    • First and foremost I think is the disintermediation risk.
      • You need to look at the financial and psychological deterrents that contract holders have to surrender their contracts.
    • Obviously a very important factor is the prevailing interest rates in the market for comparable products and for other financial instruments in general.
      • Obviously we cannot operate in a vacuum.
      • Historically credited interest rates to policyholders, particularly the existing level, is a substantial consideration.
    • Any “expectations to policyholders that may have been created.”
      • The past experience for the product and how that relates to the original pricing assumptions is also needed.
    • Product specific characteristics including embedded policyholder options in the program.

—  Allan L. Chapman, a Senior Vice President with Executive Life Insurance Company in Los Angeles

1988 – SOA – Repricing Considerations — In Force Blocks of Business, rsa88v14n32 – Society of Actuaries – 20p

  • The option to surrender a life insurance policy exposes insurers to macroeconomic activity that may result in disintermediation and possible financial distress.

2013 – AP – An Empirical Analysis of Life Insurance Policy Surrender Activity, by David T. Russell, Stephen G. Fier, James M. Carson, and Randy E. Dumm – 23p