Those who recall the coming of the first Triple-X in January 2000 will remember how 20 and 30 year guaranteed policies were adversely impacted by that regulation. Prices for such products, after January 2000, took a sharp upward turn in price. Consumers who acted to buy competitive 20 and 30 year policies, prior to January 2000, ended up with some competitive products at great prices. They did themselves a big favor by acting quickly, and agents who pointed consumers to those product while still available, did well by generating high sales volumes.
And now there is another variation of Triple-X on the horizon, which specifically is targeting "no lapse U/L" products. For those who are willing to inform themselves on this subject, I think there is another "fire sale" opportunity that you do not want to miss. More important, this is a fire sale opportunity I would hate to see your clients miss.
The original triple-X was a regulation which was introduced to "toughen up" the rules regarding the reserves which life companies need to carry for term products where level premiums are guaranteed for longer than 10 years. Supporters of the original Triple-X regulation argued that life companies were using a loophole to escape carrying adequate reserves and that the loophole needed to be closed.
During the period when the NAIC was trying to sell this regulation to state regulators, I was a vocal opponent because of the existence of another loophole which I saw as a serious problem for consumers.
As noted, the regulation was targeted at level premium products which guaranteed their level premiums longer than 10 years. For example, if a policy guaranteed its premium for 30 years, the rationale was that some companies were not carrying adequate reserves for those 30 year products and the rule imposed higher reserve requirements. For a life company to put aside higher reserves, it translates into a higher cost of capital which is itself an increase in the cost of providing the insurance coverage. In other words, premiums would have to go up to cover the cost of providing for those higher reserves.
To summarize, I am not opposed to higher reserves that are necessary to guarantee the safety of companies/products, but everyone needs to keep in mind there is a cost associated with providing that safety and it is the consumer who pays that cost. It must also be kept in mind that any cost over and above what is actually needed, is a waste of the consumer's money and I am very opposed to that. To add insult to injury, if the consumer pays too much, it is the company who ends up profiting from that extra cash and I can't stand unnecessary government rules that take from consumers in order to give to corporations.
But in the final analysis I am not an expert on reserves, and I am not in a position to say what is or isn't needed. However, a loophole in the original Triple-X led me to believe that the supporters of the regulation were less than sincere in their position that it was really needed.
The loophole that I am referring to was the fact that if a company elected to NOT guarantee the 30 year premium for 30 years, and only guarantee it for 10 years, the company could ignore the new rules and avoid the reserves supposedly needed. This gave an unfair pricing advantage to non-guaranteed products, all courtesy of government regulation.
My problem with 30 year policies that only guarantee premiums for 10 years is that a life company can come back later, jack-up the premium for the 30 year policy in the 11th year (or anytime following) and the consumer can end up stuck with what was an unexpected, and possibly unfair, price increase. Worse, the consumer, now being 10 years older, and having already shelled out the heavier extra premiums to cover the cost of a 30 year premium versus a cheaper 10 year premium, loses if he or she decides to move on to a new policy.
It was the combination of these self evident facts that led me to use colorful language such as "consumers could be held hostage" to such non guaranteed contracts and "consumers could be bushwhacked by higher unexpected premiums". Not only was that language appropriate then, it continues to be appropriate. I maintain my view that non-guaranteed 20 and 30 year products are not good product alternatives although they cannot simply be dismissed out of hand. The problem is that their very existence complicates what would otherwise be a simple decision for consumers to make about which type of product to buy. We don't let people sell cars without seat belts, and the government should not let people buy 30 year term plans that do not guarantee premiums for 30 years.
It should further be noted that there are recent developments in product pricing that lead me to believe that my position on this has not only been well founded, it could be correctly described as having been prescient.
All that as background to say that my position was that Triple-X should not be applied JUST to guaranteed products, but also to non-guaranteed products. If the concern about reserves was legitimate, that reserves were too low (and I was not convinced of that), then regulators should not give life companies a loophole to evade the need to carry adequate reserves. Despite that view, regulators have continued to give non- guaranteed products a pass and continue to be on the rampage to track down competitive guaranteed products wherever they may be found.
This brings us to the “no lapse” U/L products, which guarantee face amounts and premiums to age 100 or longer. As you know, these have been growing in popularity. In case you hadn't noticed, over the past 5 years these products have been getting more and more competitive. Regulators, spurred on by the traditional elements of the industry who are feeling the bite from those products, have taken note and are hot on the trail. The NAIC has been actively working on a new Triple-X rule which specifically targets U/L "no lapse" products.
Based upon my reading of the process, it is my view that the regulation is close to adoption by the NAIC. It is also my view that once the regulation is implemented, that premiums for these products will skyrocket. In the same way that 30 year products were impacted much more than 20 year term products, and that older ages were impacted much more than younger ages, no lapse U/L products will be even more negatively impacted than 30 year products were and will be particularly hard hit for older aged cases. The actual amount of increase is not something I can speak to intelligently, but my gut feeling is that price increases will be much, much higher than you might imagine.
There is another particularly important reason why I see this as a last ditch fire sale opportunity for your clients and you. For those who have forgotten how quickly Triple-X impacted term prices in January 2000, let me assure you it happened very, very quickly. While some companies delayed implementation for a month or two, the fact is that within 3 or 4 months ALL products had been re-priced.
By contrast, and while the majority of states have implemented the new 2001 CSO tables, we have yet to see ANY impact on term prices as a result of the new CSO tables. That's not because there is no impact, it is because there are still some states which have not yet passed the new tables.
Why is there such a difference in the speed of implementation?
You must remember that life companies that operate in multiple states must satisfy the rules of the state which imposes the strictest or most conservative reserve rules. Life companies do not have the option of differentiating in reserve rules on a state by state basis. If one or two states are still using 1980 CSO tables, which are more conservative than the 2001 CSO tables, the states using the 1980 tables require that companies utilize those tables for all their products sold regardless of which state they are sold in. This means that a handful of states, which have not passed the more liberal reserve rule, are effectively holding up the implementation of the regulation for the ENTIRE COUNTRY. It is my view that it is the consumer that is paying for the tardiness of those states who seem to think they have more important things to do. Shame on those states!
By contrast, the new Triple-X regulation for U/L no lapse policies represents the more conservative rule. Just as soon as a handful of states adopt the new rule, the rule will directly impact all products sold in all states because that rule must be implemented by companies for all products sold in all states or the company is not in compliance with the state that adopted the rule.
To sum it up more simply, any rule that lightens reserve requirements cannot take affect until passed by all states whereas rules that tighten up reserves are effectively implemented in all states by passage in just a handful of states. That is why the 2001 CSO tables are not likely to impact insurance products before 2006, whereas the new Triple-X regulation, which may be passed before the end of the year, could take affect much sooner.
And once the new Triple-X regulation is passed, you will see no lapse U/L product prices jump and I suspect jump so high that the product will no longer represent a competitive alternative to traditional whole life products. While I may be wrong, I suspect that no lapse U/L products are on the verge of extinction which is a dirty shame given that those products represent an excellent permanent insurance alternative for consumers who need insurance for "when you die needs" as opposed to "if you die needs".
My advice to subscribers is to sell these products while they are still hot, because they are not going to last very long.
