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NALC
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NALC 2004 Spring Conference Report
Thursday, April 1Commissioners PanelWalter Bell, Insurance Commissioner, State of Alabama
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| Commissioners Bell, Praeger, and Wooley served on our Commissioners'
panel. Commissioner Bell discussed federal regulation of insurance. He
indicated the driving force behind this effort was a desire for swifter
speed to market action and a more consistent regulatory approach by the
states. The NAIC is attempting to address those concerns with the
interstate compact. He also noted the efforts of the states of
California, Florida, and Texas to create a mini-compact to deal with
product approval and other issues. As Vice Chair of the Life A
Committee, Commissioner Bell will play a key role in the debate over the
small face amount issue. He expressed his desire to hear from the
industry, and felt like a solution could be reached without regulatory
action. However, Commissioner Bell indicated he felt that the ultimate
solution required some additional benefits or premium adjustments once a
policyholder's premium payments exceeded the face value. Commissioner Praeger also discussed the challenges of federal preemption of state regulation of insurance. She discussed issues before the B Committee, as well as legislative and regulatory changes in the state of Kansas. She entertained several questions on long term care regulation. Commissioner Wooley pointed out that the federal government's track record in its regulatory role of decreasing costs and improving efficiency was poor. He suggested companies supporting federal regulation needed to take a closer look at the potential impact of such regulation. Additionally, he reiterated his opposition to continued debate over the small face amount issue. He feels that the NAIC has done all it can and should do on the issue. |
Commissioners Bell, Praeger and Wooley |
Wanda Smith, Mike Granger, Rob Hardy, & Rick Campbell
Federal Preemption of Insurance….. A Godsend or a Gorilla to State Regulation
Tom Player, Managing Partner, Morris, Manning & Martin, LLP
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Tom Player presented a review of the current status of
proposals for Federal oversight and/or standards for the insurance
industry. He reported on timely testimony of state regulators before
Congress, on the latest Study published by the University of
Massachusetts and on Congressman Oxley's so-called Federal tool box
proposal. As a conclusion to his presentation, he set out his thoughts as to why it is important for insurance company proponents of state regulation to be at the table when these initiatives are taking shape. |
Friday, April 2
Alternative Risk Transfer Solutions
Kirk Lloyd, Financial Advisor, Merrill Lynch
Ronnie Dennis, Wealth Management Advisor, Merrill Lynch
Chuck Devereux, Vice President & Co-Head of Private Placements, Delaware
Investments
| Ed Stephenson, Director of Operations with Barnert
Associates, discussed investment related matters pending before the
NAIC. Barnert Associates provides advice to the Investment Committee of
the NALC, and monitors investment issues at the NAIC. Ronnie Dennis, a Wealth Management Advisor with Merrill Lynch, and Chuck Devereux, Vice President and Co-Head of Private Placements at Delaware Investments, discussed alternative risk transfer solutions and investment alternatives, respectively. Mr. Dennis brought up business opportunities for life insurance companies in the captives arena, and Mr. Devereux offered insight into private debt placements, mezzanine finance, and hedge funds as investment options for companies. |
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Personnel Issues Impacting Insurance Companies
Kathy Demarino, Vice President, Industry Relations, The
Londen Companies
Ted Speth, Managing Partner, Haynesworth Law Firm
Kathy
Demarino of the Londen Companies provided practical insight on screening
employees for hiring, and also discussed retention issues as well.Ted Speth, an employment law specialist with the Haynsworth Law Firm, presented on employment related issues impacting life insurance companies. He discussed civil rights claims post race based premium lawsuits, along with issues involving sexual harassment, sexual discrimination, and age discrimination. He focused on an employer's responsibilities in the event of an allegation. Mr. Speth also discussed issues related to wage and hour workers under state and federal law. One particular issue of concern is the appropriate classification of workers as salaried. Mr. Speth discussed issues involving misconduct by independent agents as distinguished from employees, and provided information on preventative actions a company should take to avoid employment related claims.
Noninsurance Insurance Products: How to Make Money without Marketing Costs and Regulation
Greg Bruner, Senior Vice President, Michael Edwards Direct
Marketing
Jay Jaffe, President, Actuarial Enterprise, LTD.
With ever declining investment income, many life carriers, both large and small, are finding some profit relief from a logical place but unlikely product line. The place is the policyholder file but the product lines are noninsurance offerings that have some of the same feel as insurance products. Noninsurance products have a lot of similarities to insurance products but with some notable exceptions: no licensing requirements, no premium taxes, no policy filings, no premium regulation, and no risk based capital requirements. Some examples of noninsurance products include debt protection, warranty products, auto clubs, and discount programs like dental, vision and pharmacy. These products are capable of generating 50% ROI, if properly managed.
The key elements to make noninsurance programs work are a policyholder base and a convenient billing mechanism, such as pre-authorized checking, credit card or an established direct mail billing history. Of course, the chosen product or products must match the needs of the policyholder base. And, since most noninsurance products are distributed using direct marketing methods (such as mail or telephone), there is a need for both marketing capital and a certain amount of direct marketing expertise. If you would like to see if your policyholder file has the potential to generate significant noninsurance profits for your company, contact Jay Jaffe, Actuarial Enterprise, Ltd. 312-397-0099, or Greg Bruner, Michael Edwards Direct, Inc., 312-944-0606, for a free, no-obligation analysis.
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The NALC Historical PerspectiveAndy Hansen, Executive Vice President, Old American Insurance
Company
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Andy Hansen – Recipient of the 2004 Governor’s AwardThe Governor's Award is presented periodically by the National Alliance of Life Companies to an individual who has provided exemplary service to the life insurance industry. At the 2004 Annual Meeting Banquet, the NALC Governor's Award was presented to Andy Hansen. Mr. Hansen has been involved in the life insurance industry for almost 40 years and is currently an Executive Vice President of Old American Insurance Company where he has worked since 1987. Unfortunately for the industry, Andy will be retiring later this year. For the past 10 years Andy has been an active member of the NALC and has served on the NALC Board of Directors for six of those years. During his tenure Andy has served as President, Vice President and Secretary of the organization. It has been under his enthusiastic leadership that the NALC has flourished in an ever-changing regulatory environment. He has taken the NALC to new heights and fostered serious deliberation about the future of the organization. He has given many years of dedicated service not only to the NALC but to the industry as a whole. The NALC Board of Directors proudly honored Mr. Hansen by presenting him with the Governor's Award. The Governor's Award was established in honor of Harry Lee Waterfield, former two-time Lt. Governor of Kentucky and Chairman and CEO of Investors Heritage Life Insurance Company. Mr. Waterfield, who was involved with the NALC for many years, believed that small and mid-sized companies needed a voice and worked with others to establish the NALC as that voice. |
Andy Hansen & NALC President Rob Hardy
Andy & Margaret Hansen
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Actuarial UpdateBy Roger Annin, FSA, MAAAThere are three "actuarial" issues that may affect business activity for member companies. These issues are:
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Reduction in Valuation Interest Rates
The Standard Valuation and Nonforfeiture Laws provide formulas for determining reserves and nonforfeiture benefits. The formulas include interest rates to determine the present value of future benefits and premiums. These interest rates are "indexed" to market averages, so they will change as market conditions change. The interest rate index formulas are complex, but a key term in the formulas is the 12-month average of the Moody’s Corporate Bond Yield. This average is calculated based on interest rate levels from July 1 through June 30. Hence, for the current year, we know 9 of the 12 monthly averages and are still waiting for the April, May and June averages to fall into place.
Of course, we all know that interest rates have been low over the past several months. If we were to use the 9-months interest rate average and assume that interest rates remain level at the March average, we would see a reduction in the life insurance valuation interest rate from 4.50% to 4.00%, effective January 1, 2005. This would be the first reduction in valuation interest rates since 1995.
What this means is that every company will need to restate reserve factors for traditional life products to a 4.00% basis, prior to January 1st. Reserve factors will increase, resulting in lower ROE’s and greater initial surplus strain. There is a one year deferral for nonforfeiture rate changes, but on January 1, 2006, cash values factors would be reduced from a maximum rate of 5.75% to 5.00%.
Of course, we cannot be sure the change is coming until after the April, May and June interest rate levels are known. However, even with the bump-up we saw in early April, it is likely a rate change will occur. Even if a rate change does not occur, this is perhaps a "wake-up" call for some companies to recognize that yields are dropping and policies designed based on higher net returns may need to be re-evaluated.
From a product perspective, there are four courses of action that could be used. Briefly, these are:
- File for the reserve rate change only, but do not reprice the product or change cash values. Filing will likely be done on an abbreviated basis – policy language will not change, so an actuarial memorandum may be adequate. This is a temporary solution, but buys some time to look at product design and pricing. A second filing may be required the next year due to cash value changes.
- File both reserve and nonforfeiture changes, but do not otherwise change the policy. This is a more involved filing , but postpones or eliminates a second filing based on rate changes. However, this may leave the company with drastically reduced or negative margins unless premiums are evaluated.
- File reserve, cash value and premium changes. This effectively reprices the product according to market conditions and recognizes the impact of change reserve and cash value factors. The only item this does not account for is the coming mortality table change.
- File reserve, cash value and premium changes recognizing both interest rate and mortality table changes. This is the most complete approach, but may involve more effort to reprice and/or redesign products. Also, see the mortality table comments in the section below.
I recommend that each company review your pricing assumptions for key products. If your products were priced assuming higher interest rate yields, you may have non-existent margins! In this case, I would recommend you adjust premiums as well as reserves and cash values. Otherwise, you might be able to buy some time, but it is probably wise to begin studying product changes that are going to be required over the next year or two.
Adoption of 2001 CSO Mortality Table
States continue to review and adopt the 2001 CSO Mortality Table. With the potential for life product interest rate changes, discussed above, some companies are considering whether they should refile products using the new table and thus, "killing two birds with one stone". Since the valuation rate changes would be effective January 1st, one question is "How many states will have adopted the 2001 CSO by January 1st of next year?" While we can’t guarantee our answer, we expect all but 10 states may have the new table effective at that time. This is based on current adoptions and projected activity. The states we show as potentially not having the new table adopted are:
| Alabama Alaska Connecticut Georgia New Hampshire |
North Dakota Rhode Island Virginia West Virginia Wyoming |
Again, states not listed above either have adopted the new table already with an effective date of January 1st or earlier, or are expected to take action prior to that date.
Not all products will perform well under the new table, but most traditional whole life type plans will benefit under the new table. For this reason, we recommend that companies at least consider the new table if they are revaluing plans for interest rate changes. The new table will become mandatory no later than January 1, 2009.
Reduction in Annuity Nonforfeiture Rates
Lower interest rates are also affecting annuities. A new annuity nonforfeiture law was passed by the NAIC and is currently being adopted by states. In addition, some states had taken individual action to reduce annuity nonforfeiture rates. Our most recent tracking of the Annuity Nonforfeiture Law showed only four states that had not yet adopted some reduction in nonforfeiture rates. These states are Alabama, Mississippi, Rhode Island and Wisconsin.
With rate reductions scheduled for annuity reserves, effective for all business written this year, companies in the annuity market must continually monitor pricing assumptions and credited rates. I recommend companies examine whether lower interest guarantees should be introduced with new products or even implemented on older contracts still being issued.
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