Movie buffs may recall a film based on the true story of a fishing boat called the Andrea Gail. In real life, the entire crew of the Andrea Gail was lost at sea when they encountered three fronts that collided to produce “The Perfect Storm.”
Much like the crew on the Andrea Gail, financial advisors will also be facing their own perfect storm in 2019 comprised of three fronts: adoption of the 2017 CSO Table, Principal-Based Reserves (PBR) deadline, and implementation of the Tax Cuts & Jobs Act of 2017. These three pieces of legislation and regulation will have a greatly significant impact on the sale of life insurance products this year. Unlike the crew of the Andrea Gail who did not survive to profit from their catch however, advisors who take advantage of the year’s impending changes will be in an advantaged position to profit from this storm.
What the Adoption of the 2017 CSO Tables Means
You may have already started to notice the adoption of the 2017 CSO tables by some carrier products. The current 2001 CSO tables are based on industry experience from 1990-1995. Over the last 20 years, underwriting has changed significantly. Underwriters today have more experience with multiple preferred risk classes, larger face amounts, and older-age insureds. These experiences are reflected in the 2017 CSO tables which must be adopted for all carrier products by January 1, 2020. In general, mortality rates in the new tables are lower. This is significant because all else equal, the adoption of the 2017 CSO tables will lower reserves.
Generally, lower mortality rates mean that price sensitive products like term and universal life with secondary guarantees will benefit. In contrast, cash accumulation products may not benefit because the maximum premium that can be paid for $1 of death benefit will be lower under the new CSO tables.
Impact of Principles-Based Reserves (PBR)
In addition to the impact of the new mortality rates on reserves, the methodology used to calculate the reserves is also changing. Until this point, insurance companies calculated their reserves using conservative formulas prescribed by state laws. This would often leave insurers with excess reserves for some products and inadequate reserves for others. The solution was to replace this rule-based reserve with a principle-based approach (PBR).
The PBR requires insurers to hold the higher of (a) reserves using prescribed factors or (b) reserves which use the carriers own justified experience with factors such as mortality and expenses. Because of the effort and expense associated with PBR, there is an exemption for smaller well-capitalized companies. However, companies that elect this exemption cannot issue secondary no-lapse guarantee UL products. Once a carrier adopts PBR for a policy form, it must also adopt 2017 CSO table for that specific policy form. Until 2020, a carrier can selectively choose which policy form to move to the PBR. By 2020 however, all carriers must implement the new PBR and CSO tables for all products.
The consensus is that we will see massive carrier product price changes in 2019 because of the 2020 CSO tables and PBR implementation deadline. In fact, we have already seen some carriers reprice their term products accordingly. One carrier even introduced 35 and 40-year term options. Meanwhile, the no-lapse secondary guaranteed UL products have only seen minor changes leaving the pricing change to 2019. Will we see carriers leave the no-lapse market to qualify for the PBR exception? Will we see the significant price increases experienced a few years ago with AG 38 reserve changes? At this point, it’s not abundantly clear what will unfold. One thing is for sure, however: advisors will want to take advantage of the pricing that we have today.
How the Tax Cut and Jobs Act Creates Opportunity
The third and final front – the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) – made sweeping changes to many areas of the federal tax law. While the tax changes went into effect in 2018, many clients will first feel the impact when filing taxes in April 2019. The first two “fronts of the storm” are the pending product price changes which will occur in 2019 and give advisors an urgency to talk to their clients about life insurance. However, this third front frees up income that can be used to purchase much-needed life insurance, especially for business owners.
Many business owners will experience lower taxes this year. Specifically, owners of pass-through businesses such as S corporations, LLCs, partnership and sole proprietorships can potentially receive a 20% deduction on their qualified business income. Meanwhile, C corporation shareholders will see their corporate tax rates drop to 21% from 35%. When business owners are newly flush with cash, we can expect to see increased interest in the use of business dollars for personal benefits. With employment rates at historic lows, key person coverage and selective executive fringe benefits are also expected to be on the front burner as businesses seek to retain and attract top talent.
How DBS Can Help?
Now is the time to approach clients, especially business clients, about the price opportunities available on no-lapse guaranteed UL products and long-term level term products. Your dedicated DBS Case Design Associate is available to help you navigate the pricing storm that is likely to occur throughout 2019.