Duration

  • This paper considers alternative interpretations of ‘Duration‘ as a length of time, average life of cash flows and interest rate sensitivity as applied to UL policy cash values.
    • The interest rate sensitivity of UL policy cash values, amplified by the corresponding cost of insurance sensitivity with declining interest income, suggests UL has always been a simple question of Duration.

2011 – AP – Universal Life Insurance Duration Measures, by David Lange, Peter Alonzi and Betty J. Simkins – 14p

  • Key Attributes of Generic Life Insurance Policies — Table 4-2
    • Duration of coverage – Universal Life – Depends on premiums paid  (p111)

2015 – Book – Life Insurance 15th Ed. – Black, Skipper, Black (Huebner Series) 

  • Duration is a measure that’s used to provide information to portfolio managers about the interest rate sensitivity of their financial instruments. It’s also used on the liability side.
    • The definition of duration is the percentage change in market value given a 100-basis-point shift in interest rates.

—  Frederick W. Jackson

1997 – SOA – VASP – Market Value Measures: Duration Analysis and Economic Surplus, VASP9713 – Society of Actuaries – 56p

  • This paper considers alternative interpretations of ‘Duration’ as a length of time, average life of cash flows and interest rate sensitivity as applied to UL policy cash values.
  • The interest rate sensitivity of UL policy cash values, amplified by the corresponding cost of insurance sensitivity with declining interest income, suggests UL has always been a simple question of Duration.

2011 – AP – Universal Life Insurance Duration Measures, by David Lange, Peter Alonzi and Betty J. Simkins – 14p

  • UL insurance was an industry response to those who planned to “buy term and invest the difference” when interest rates spiked in the late 1970s.
    • It provides underlying interest rate guarantees but also promises to pass along any higher investment earnings (leading to interesting effective duration results when cost of insurance factors are applied to a lower net amount at risk).
    • Guaranteed credited interest rates are defined by the year of policy issue.
    • Margins are managed for interest, mortality and expense, but since expense charges are generally low, profit and expense margins (along with cost of capital charges) come primarily from the interest and mortality components.
    • The mortality charge is based on current age and is applied to the net amount at risk, the face amount net of the tax-deferred buildup of account value.

2014 – SOA – Sustained Low Interest Rate Environment: Can It Continue? Why It Matters, 2014-sustianed-low-interest-environment – Society of Actuaries – 51p

Interest

  • (p9) – The literature attached to the conservation brochure read:
  • “At Minnesota Mutual, we believe you should get an up-to-date return on your insurance dollars – no matter how long you’ve owned your policy.
  • With Ultimate Interest™, our unique interest crediting method, we credit current, competitive interest rates to each premium payment.
  • That means every time you pay a premium, we credit it with an interest rate that reflects market conditions on the day we receive it.
  • So you’re always assured of earning current market rates.”

1999 – LC – Zarrella v. Minnesota Mutual Life Ins., 96-2782 – Opinion – 26p

Churning

  • Churning will be high as comparisons of recent performance and illustrations will “prove” the necessity for a switching.

—  Dale R. Gustafson, Northwestern Mutual

…asks why the really hard questions about the product aren’t reflected in the articles we printed. His nominees for the hard questions are:

1981 11 – SOA – The Actuary, /act-1981-vol15-iss09-moorhead-e – Society of Actuaries – 2p

  • 7. Consider Charges for 1997 and 1998
    • 3. Make recommendations for new models or changes to existing NAIC model laws or regulations to address issues related to problems of churning.

1996-4V2, NAIC Proceedings

  • (p21) – Senator Howard Metzenbaum (D-OH):  At a recent meeting of underwriters, Thomas Wheeler, a chief executive officer of Massachusetts Mutual, said in the last decade:
    •  “Some companies encourage churning”, meaning rolling over whole life business into universal life.
    • Not only did these companies swap high-margin products for low-margin ones, they often incurred additional acquisition costs.
    • ⇒  Do you agree with Mr. Wheeler’s remarks?

1993 0525 – GOV (Senate) – When Will Policyholders Be Given The Truth About Life Insurance?, Howard Metzenbaum (D-OH)  —  [BonkNote]

Twisting

  • We have all heard some talk about twisting, and it has strong negative connotations.
    • Universal Life, mainly because of its premium flexibility, has changed that.
  • I recently heard one of our marketing people refer to replacement of old traditional permanent policies with Universal Life.
    • He called it “The Enlightened Liberation of Assets”.

—  Stuart Grodanz, Travelers 

1984 – SOA – Variable Universal Life, Society of Actuaries – 22p

  • Historically, companies were reluctant to replace life insurance because they might be in violation of the “twisting” laws.
    • Times have changed.
  • In 1969, the National Association of Insurance commissioners developed the 1970 Model Life Insurance Replacement Regulation.
    • This removed most of the “twisting” fears. 

—  William T. Tozer, ACLI

1981 – SOA – Individual Life Insurance Cost Disclosure Issues, Society of Actuaries – 22p

  • Bill White, chief actuary, New Jersey, reported on their special project pertaining to universal life. – <WishList>
  • Their commissioner, on June 25, 1982, declared an 81-day moratorium on “Universal-Flexible Factor” type of policies.
  • His staff was directed to
    • (1) study the matter and issue a position paper on the subject;
    • (2) conduct public hearings on March 10-11;
    • (3) terminate the moratorium April 16 with the publishing of a set of guidelines. – <WishList>
  • Reports and results have been mailed to each insurance department.
  • Some of the questions New Jersey conveyed included:
    • (1) are these policies participating or non-participating;
    • (2) the “Bait and Switch” potential;
    • (3) disclosure;
    • (4) Federal Income Tax aspects;
    • (5) non-forfeiture values;
    • (6) replacement problems.
  • The concern was not just with the “twisting” replacements, but was the impact of justified replacements on the solvency of replaced companies.

1982-2, NAIC Proceedings

  • Most life insurance companies, it is true, will cancel the contract of an agent found guilty of replacing a policy already carried in his own or another company, by a new policy and such a practice is usually referred to as “twisting.” (p21)

1940, NAIC Proceeding

  • ROWS ABOUT TWISTING
  • In the seventies, when life insurance companies in the United States were passing through the crucible, all sorts of things were done which nowadays are denounced, at least, if not avoided entirely.
    • The trouble was that more than half the life insurance companies of the country were in a failing condition, and their only hope often was to diminish their liabilities by twisting policies from one form to another or to escape the liabilities in whole, or in part, by making an arrangement with another company to furnish it a list of the policyholders, so that it could do the twisting.
    • The four or five companies that were swallowed up in the Universal reached an apparent state of solvency in that manner.
    • They had some kind of an understanding.

1898 – Book – Things Agents Should Know: An Intensely Practical Book for Life Insurance Agents – by Miles Menander Dawson 

  • Sharp competition was developing among companies and agents, the Massachusetts Commissioner complaining about agents besieging his office for information recommending their companies, or depreciating others,” and the New York Superintendent protesting against agents’  commissions of from twenty-five to fifty per cent of first premiums, which resulted in the selling of policies by any and all methods, followed by a sad lapse record.30
    • Complaints of “twisting“ also began to arise during this year.31  (p138)

1920 – Book – The History of Life Insurance in the United States to 1870: With an  Introduction to Its Development Abroad, by Charles Kelley Knight, University of Pennsylvania – [2xxp-GooglePlay]

Trends

  • First of all, what are the current trends with respect to the sales of Universal Life?
  • As most of you are aware, the slow movement to Universal Life has become a tidal wave.

—   Randall P. Mire

1983 – SOA – Universal Life (rsa83v9n32), Society of Actuaries – 22p

  • In recent years many companies have experienced a shift from permanent to term insurance, probably because of the recent recession and the emphasis on the lower going-in cost for term insurance.

— William H. Bowman

1975 – SOA – An Approach to Reserve for Term Insurance Conversion, Society of Actuaries – 36p

  • …. a significant trend within the life insurance industry to conduct business within a holding company….

119 Cong. Rec. (Bound) – House of Representatives: November 26, 1973

Congressional Record (Bound Edition). Thursday, November 29, 1973.

Whistleblowers

  • 2022 0212 – Twitter – @MartyLeary1 – [link]
    • I believe most frauds that come to light do so because an internal whistleblower teamed up with a good journalist.
    • 2009 – AP – Who Blows The Whistle on Corporate Fraud? – 44p
  • 1995 1120 – The Tampa Tribune – MetLife Case Became Too Much for Whistleblower – [Kirby Grayson], by Cheryl Jackson  —  [BonkNote]
  • 1995 1121 – Tampa Bay Times – Key player in MetLife case found dead, by Robert Keefe – [link]
  • 3.3 Communication within the insurer
    • 68. Examples include having an internal forum for staff to speak openly about their job challenges without fear of recrimination, an effective whistle-blowing mechanism that preserves staff confidentiality, and management proactively engaging in dialogue and taking steps to make necessary adjustments.  (p27)

2021 – IAIS – Draft Issues Paper on Insurer Culture – 32p

  • (p9) – George Miller (D-CA) –  I think they ran amok. I think maybe my own State was remiss in their regulation. There were warning signs. The industry raised warning signs about this problem. They were rebuffed.

1991 0502 – GOV (House) – Oversight Hearing on the Effect of Proposals to Reform Federal Deposit Insurance on Pension Funds, Pat Williams (D-MT) – [PDF-225p-GooglePlay]

Root Cause

  • FSB
  • As we began researching this problem, two questions became central.
    1. What criteria should we use to evaluate suggested changes and alternatives?
    2. What is the root cause of current problems, and why have previous corrective efforts been so unsuccessful?
  • As research continued, at some point we started to focus on the uses of life policy illustrations.
    • This proved to be a key concept in addressing those two major questions.
  • First, let’s list the major user groups: (1) consumers, (2) agents and brokers, (3) life companies, and (4) third-party analysts. We are all familiar with the first three groups.
    • The third-party analyst is a more recent phenomenon and could be a CPA, consulting….”

—  John R. Skar

1991 – SOA – Illustrations, Society of Actuaries – 20p

  • 2018 – A Review of Root Cause in Insurer Insolvencies and Impairments,  by Dave Heppen and Veronika Cooper, Society of Actuaries – 6p

Tipping Point

Dear Editor:

Life Insurance Sales Illustrations – A Call to Action

  • We have reached the stage where a life insurance sales illustration is hardly worth the paper it is printed on.
  • Yet thousands of agents are confidently presenting these illustrations to frequently unsuspecting clients.
  • I have yet to discuss this issue with anyone in the industry – home office or field – who doesn’t agree that the current situation is a mess.
  • But everyone also agrees that no single company can try to institute change by, withdrawing from the illustration game.
  • Sooner or later, surely, the whole house of cards will come tumbling down.

—  Daphne Bartlett

1988 – Article from: The Actuary June 1988 – Volume 22, No. 6

  • The Tipping Point: How Little Things Can Make a Big Difference, Malcolm Gladwell

 

  • I’d like to take that one step further.
  • What I noticed was there is a requirement for in-force illustrations, and people may have thought they bought one thing and whenever you have to give them an in-force illustration with a current disciplined scale, they’re going to realize they bought something else.
    • I think many companies will have serious problems with policyholder retention.

—  Mark J. Greene, FSA. MAAA, Supervising Actuary, New York State Insurance Department

1995 – SOA – Illustrations and Nonforfeiture Values, rsa95v21n123 – Society of Actuaries – 14p

Long-term

  • As a liability-driven business, insurance often has long-term cash-flow patterns compared to shorter-term activities at banks.
  • Consequently, current law fails, I believe, to adequately account for the business model and risk profile of insurance companies, and that should concern us all.  (p1)

— Senator Richard Shelby (R-AL)

The State of the Insurance Industry and Insurance Regulation – [PDF-56p, 

  • If the companies offering Universal Life were to respond by investing long-term, they could expose themselves to problems of disintermediatlon and market value adjustments even worse than under traditional policies.

—  Kenneth T. Clark

1981 – SOA – The Future of Permanent Life Insurance (rsa81v7n36), Society of Actuaries – 22p

  • Moreover, given the long-term nature of life insurers’ obligations to their policy holders, they are exposed to substantial risk based on market fluctuations and turns in the economic cycle.
    • Thus, it could be easily argued that they need more, not less, capital than banks based on the long tail of their liability structure.  (p5)

2014 0310 – Letter – Sheila C. Bair to Senator Sherrod Brown (D-OH) – 6p

  • 199X – GOV – Dole??
  • Summing up, it seems to me that reasonable assumptions for annual premium policies must recognize the long-term commitments in question, and thus should consist of a realistic current mortality table with projection into future years, together with an interest rate not higher than 3% and preferably somewhat lower.

—  Wilmer A. Jenkins

1961 – SOA – Ordinary Insurance Premiums, Society of Actuaries – 3p

  • Dale R. Gustafson  – …nominees for the hard questions are:
    • Are short-term new money investments appropriate for a product designed to meet life-long insurance needs?

1981 11 – SOA – More on Universal LIfe, The Actuary, Society of Actuaries – 3p

  • (p63) – Spencer BACHUS (R-AL). – Mr. Liddy, mark-to-market, I think, is good in concept, but insurance and banking CEOs are telling me that it is not working well in a distressed market.
    • I would like your comments on modifications others have proposed, and general modifications, and how it might help AIG to increase the likelihood of the taxpayers being fully reimbursed.
  • Ed LIDDY. (AIG-CEO) – Yes, sir. I think mark-to-market is a good concept, run amok.
    • On balance, knowing what something is worth every day is a good thing, but it presumes that there’s a market.
    • It presumes that there’s a willing buyer and a willing seller.
    • When liquidity completely dries up, there’s not a willing buyer, so you have to keep marking the value of the assets down to an unwilling buyer level.
    • In insurance companies, we have a long liability.
    • We will insure your life.
    • And we will match it with a long dated asset.
    • Those long dated assets, like commercial mortgage-backed securities and residential mortgage-backed securities, because they’re long-dated, they are not liquid right now, and they have been buffeted in value, unlike anything most of us have ever seen.
    • So as a result of that, AIG and many other insurance companies have had to write the value of those assets down, and it has caused great stress on the liquidity.  

2009 0318 – GOV (House) – American International Group’s Impact On The Global Economy: Before, During, And After Federal Intervention – [PDF-380p,  

  • (p22) – Although these products generally are considered to be long-term liabilities and a number of these products include provisions that are designed to disincentivize withdrawals, such as penalties and loss of guarantee accumulation, these disincentives could serve as less of a deterrent if MetLife’s ability to meet its obligations were in doubt. 
  • (p24) – Further, the imposition of a suspension of insurance policy and annuity product surrender or withdrawal options could cause uncertainty to spread to the customers of other insurance companies offering similar products and could undermine confidence in the broader life insurance industry.
    • If such a situation were to occur during a period of overall stress in the financial services industry and in a weak macroeconomic environment, surrenders at other life insurers could increase, particularly if MetLife’s material financial distress were related to a broader economic shock or market event, such as an interest rate spike or impairments in a widely held asset class. 

2014 1218 – FSOC/MetLife – Basis For The Financial Stability Oversight Council’s Final Determination Regarding Metlife, Inc – 31p

  • But many of the risks we take are associated with long-term liabilities, things like life insurance.
    • That is a mortality risk.
    • The evidence as to whether that mortality risk was appropriately taken or not will be very far into the future.

—  Robert M. Falzon, Executive Vice President and Chief Financial Officer, Prudential Financial, on behalf of the American Council of Life Insurers (ACLI) and the American Insurance Association 

Examining Insurance Capital Rules and FSOC Process – Examining the Federal Reserve’s Implementation of the Collins Amendment to Tailor Capital Rules for Insurers on FSOC’s Designation Process for Nonbank SIFIs and for International Capital Developments for Insurers – [PDF-70p

  • For another, life insurance companies suffered large losses on a mark-to-market basis during the crisis from the decline in equity prices, as well as falling prices of mortgage and other fixed income securities that were being sold by others facing immediate cash needs.
    • As a result, in early 2009, some had negative tangible equity value on a mark-to-market basis.
    • This was reflected in the price of their shares, which, on average, dropped 75% over the course of the crises.
    • A few applied for TARP assistance for additional capital.
    • But they faced little or no financial distress because their liabilities, principally obligations to make payment on policies, were long term.
    • They could and did wait for markets to return to more normal levels.  (p30)

2013 10 – AP -Five Years Later: Lessons from the Financial Crisis, by Jeffrey R. Shafer, Former bank executive and Senior Treasury official – 67p

  • …universal life and investment-type products (collectively, investment-oriented products)….. (p53)
  • Update of Actuarial Assumptions
    • The life insurance companies review and update actuarial assumptions at least annually, generally in the third quarter.
    • Assumption setting standards vary between investment-oriented products and traditional long-duration products. (p123)

2018 – AIG – AIG Annual Report – 372p

  • 10.3.1.2.2 U.S. GAAP Example – Valuation of life and other long-term insurance liabilities
    • 234. For insurance liabilities that are measured under U.S. GAAP as the net present value of cash flows using current or updated assumptions, the valuation of these items should be based on the Volunteer IAIG’s reported U.S. GAAP valuations.
    • 235. For insurance liabilities that are valued using historical, locked-in assumptions (e.g. long-term insurance contracts measured according to ASC 944-30-7, formerly SFAS 60) or valued under a retrospective deposit method approach (e.g. universal life insurance contracts measured according to ASC 944-30-16, formerly SFAS 97) it will be necessary to adjust the liability utilizing the Gross Premium Valuation (GPV) approach as defined in loss recognition (premium deficiency) testing under U.S. GAAP ASC Topic 944-60.
    • 236. The GPV is calculated by estimating the present value of future payments for benefits and related settlement and maintenance expenses less the present value of future gross premiums based on actual and anticipated experience.
      • Projections may be based on a single best estimate scenario and may also include the impact of management actions, e.g., the current estimate of future premium rate increases (see section 6.3.12 on management actions).
      • Any overhead expenses would be excluded.
      • The discount rate applied would be based on a current portfolio yield and expected reinvestment asset yields and cash flows. Gross rates would be reduced for expected defaults and investment expenses.

2015 – IAIS –  Field Testing – Public Technical Specifications Page 54 of 230

  • 7.5.2 Feedback from field testing
  • 252. There is support from Volunteer Groups for an extension of management actions to include limited premium increases for certain business and product types, including Health business.
    • Examples provided of other instances where the recognition of premium adjustments should be considered included yearly renewable term (YRT) premiums in certain long-term life reinsurance agreements, cost of insurance (COI) charges in certain long-term life insurance contracts, including universal life, and adjustable premiums on adjustable premium term life insurance.
    • It was noted, though, that premium increase could lead to other policyholder actions such as increased lapses and possibly reputational risk.

2018 – IAIS – Risk-based Global Insurance Capital Standard Version 2.0 Public Consultation, 31 July 2018 – 30 October 2018 – Page 69 of 158

Moratorium

  • Moratorium
  • Stay
  • Contractual 
  • State
  • Courts
  • (p16) – Willis B. Howard, Jr., NOLHGA – National Organization of Life and Health Insurance Guaranty Associations:
    • I’d like to respond briefly to my honorable friend, Commissioner Bartlett.
    • Dwight, the guarantee association system works, and it works well.
  • Dwight K. Bartlett III, Maryland Insurance Commissioner:
    • Are you going to tell me, Bill, in all honesty that you really believe that the policyholders of Executive Life and Mutual Benefit Life have been well-served?
    • For example, with Mutual Benefit, if you opted out of that rehabilitation plan you get, as I recall, 55 cents on the dollar of your account value.
      • If you opt into the plan, you agreed to subject yourself to a moratorium period, which means you do not get full access to the cash values of your policy until the next century.
    • Are you going to say that’s meaningful coverage for those policyholders?
    • ⇒  I think that’s ridiculous.

1994 – SOA – Valuation Actuary – Symposium Proceedings – Session 1 – Introduction and Overview, Society of Actuaries – 110p

  • I question the argument that insurance organizations should have weaker bank/thrift holding company protections because their insurance policy holders can’t easily cash out if they make bad investments.

2014 0310 – Letter – Sheila C. Bair to Senator Sherrod Brown (D-OH) – 6p

  • Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection
  • Re: Subcommittee Hearing: “Finding the Right Capital Regulation for Insurers”
  • The very nature of insurance significantly reduces the potential of a run-on-the-bank scenario for property/casualty, health and most life insurance products.
  • For those limited products sold by insurers that could be subject to some level of run risk, mitigating factors exist such as policy loan limitations, surrender/withdrawal penalties, and additional taxes.

—  Kevin M. McCarty – NAIC Testimony – Commissioner, Florida Office of Insurance Regulation and President of the National Association of Insurance Commissioners – 8p

2012 1129 – GOV (House) – Examining the Impact of the Proposed Rules To Implement Basel III Capital Standards – [PDF-439p, VIDEO-?]