The World of Life Insurance: Version 2023 - A Conversation with Bobby Samuelson and Marc Schwartz

In May of 2019 we posted a conversation with Bobby Samuelson to Windsor's website that we ambitiously called, The World of Indexed Universal Life.  That blog has led all Windsor blogs in popularity right up to today.  Indexed UL has expanded beyond the boundaries of those early days to become a formidable product with wide appeal to financial professionals and to insurance-buying consumers.  And, because of its rapid growth in the marketplace, it has more than once caught the eye of insurance regulators.

Today, Bobby Samuelson graciously joins us again for a conversation with Marc Schwartz about "The Life Insurance World:  Version 2023."  Bobby's expertise and insight regarding the often-complex workings of life products have served the industry well for years now, and his Life Product Review publication continues to be a valuable source for independent, objective and technical life insurance product intelligence.

In 2019 we began our conversation with the illustration controversies surrounding Index UL products, and then turned to the efforts and effects of AG 49.  Today, we find ourselves in a similar spot, but before we get to AG 49-B we thought we could begin our conversation at a higher altitude.

Marc Schwartz, Windsor Insurance:  Reviewing the industry numbers from the past few years, Indexed UL has increased its share of permanent life sales in every year since 2019, and, according to LIMRA, Universal Life and Whole Life premiums in 2021 represented almost 70% of individual life premium market share.  During our previous conversation, you said, "I think every time the life insurance industry has sold its products on the basis of performance, we've ended up with a black eye."  The numbers I just mentioned seem to indicate that both Indexed UL and Whole Life are being sold primarily on the basis of performance.  How do you feel about that today?

Bobby Samuelson:  Marc, thanks for having me again. The short answer is that I stand by what I said back in 2019 – and I think we're currently seeing black eyes for both of the products you mentioned, although the situation is far worse for Indexed UL than Whole Life.  Two of the key selling points for Whole Life over the past decade have been that dividend interest rates significantly outperform external interest rates and, for policies with non-direct recognition loans, the carrying cost of the policy loans.  Neither of those two things are necessarily true right now.  To the extent that Whole Life was sold on "arbitrage," the degree of arbitrage is now a lot less than it was before and has even inverted in some situations and for some companies.  However, I think the bright spot for Whole Life is that the dividend interest rates at the Big Four – Northwestern, New York Life, Mass Mutual and Guardian – have held up exceedingly well.  Far better than most people were predicting in 2020.

Indexed UL is in a much tougher spot.  The near-continuous bull run of abnormally strong equity performance from 2009 to 2021 came to a screeching halt in 2022.  At the same time, Caps on Indexed UL products have broadly declined to levels that were unthinkable a decade ago.  There are companies that have Caps today that are lower than their default illustrated rates a few years ago.  The prospects for Indexed UL performance in the next decade are nowhere near as enticing as they were in the last decade.  The story of downside protection with upside potential still works, but the upside potential is a lot less than it used to be.

Marc:   Performance-oriented product sales and illustrations go hand in hand, and illustrations have been used in the sales process to "project" future values of dividend-paying whole life, Indexed UL, Variable UL and Current Assumption UL for at least the past 50 years.   In our 2019 conversation you said, "I know this sounds extreme, but we really should stop using illustrations.They do more harm than good."  Wouldn't that approach result in a de facto death knell for what we would call "permanent" life insurance today?  And if not, then what kind of explanatory material could we develop in place of illustrations that would communicate all the advantages, benefits and flexibility that are at the buyer's disposal in IUL products?

Bobby:  If getting rid of illustrations spells the death knell of permanent insurance, then something is seriously wrong with the way this product is sold.  Anyone who actually understands how these policies work knows that illustrations have exactly zero predictive value and arguably limited explanatory value.  A better solution, in my view, is to develop materials that show how the policy actually works.  It's a pretty simple formula – premium in, policy charges out and the remainder earns interest.  You'd be amazed at how few clients and even agents understand the basic mechanics.  But once someone gets the basic mechanics, then they have a platform to understand the incredible power – and the risks – of the permanent insurance chassis.  The goal of an illustration should be understanding, not competition.

Marc:  Acknowledging that eliminating illustrations is very unlikely, regulating illustrations has been the response to perceived illustrated abuses.  AG 49-B is coming into effect over the next several months to address current IUL abuses, and you have been actively involved advocating for these changes.  Can you summarize the key impacts that AG 49-B will have on IUL illustrations, and what you anticipate the impact will be on IUL sales and the industry leaders in particular?  Also do you foresee any creative workaround to lessen the impact of these changes?

Bobby:  The quick explanation on the revisions to AG 49-A, which I've been preemptively referring to as AG 49-B, is that it brings the regulation back to what was originally intended with AG 49.  The Benchmark S&P 500 strategy sets the maximum illustrated rate for the whole product and there really aren't any workarounds in terms of illustrated rate.  AG 49-B will essentially normalize illustrated rates for all accounts with the same option budget.  Accounts with option budgets higher than the Benchmark will have no illustrated benefit and accounts with options budgets lower than the Benchmark will illustrate lower.  It's pretty straightforward.

There will be creative workarounds, particularly with policy loans.  Stay tuned.

Marc:   A couple of carriers, notably Pru and Equitable, have come out with Variable UL products based on the success of Registered Index Accounts. These accounts offer the consumer higher upside opportunity as well as limited downside protection compared to traditional index accounts.  This new category of product fits between traditional IUL and VUL products.  You predicted the development and offering of this product category.  What's your reaction to the initial product offerings and how do you see the future of this category of product developing in the near term — both from a carrier and consumer standpoint?

Bobby:   I'm excited to see how this corner of the market develops over time.  It's nothing but positive for distributors, agents and consumers.  The first two products in the market are strong offerings, particularly Equitable's because it offers a broader slate of options and is available as a rider on a broad suite of Variable UL products.  I'm a fan of Variable UL overall and these sorts of strategies just make the product category even more appealing.

Marc:   It's been several years since the arrival of Private Equity funded transactions in the life shelf space.   There have been concerns expressed from various corners of the industry.  Has it worked for all the participants — PE investors, carriers, distributors and policy owners?   Or has the success or failure been specific to individual transactions which aren't able to be generalized?

Bobby:   I think it's really difficult to paint with a broad brush on this topic.  There have undoubtedly been examples of success where all parties have benefited.  Athene comes to mind, but there are many others.  Institutional investors have proven to be savvy operators of insurance businesses and adroit investors.  But I think some of the criticism is warranted.  These firms do invest in more complex, less liquid and potentially much riskier investments in order to get an edge on yield.  At the same time, though, they tend to hold higher levels of statutory capital.  I think a recession will expose the models that are built for permanence and the ones that aren't.

On the other side, however, there have been a lot of examples of institutional activity buying run-off blocks – particularly life insurance and complex guaranteed annuity blocks – and then engaging in financial engineering in order to drain the value out of the blocks and pay handsome dividends to the new owners.  This is not a good situation for anyone but the investors and I do not think it's going to age well.

Marc:   For our final question, we want to look at the insurance industry as a whole.  With interest rates increasing and providing some relief to carriers after more than a decade of extremely low rates, an acceleration and a much needed acceptance of digital tools, capital shifts away from DTC and towards intermediary distribution, what do you see as the health and future of the life industry?

Bobby:   There are so many dynamics to this question, so I'll just pick up on a couple of things.  I think rising interest rates is a long-term benefit but a short-term problem.   2022 was a blood bath in terms of statutory surplus for most life insurers.  Based on a large sample of insurers, bond fair market values are currently sitting at around 90% of book value, which represents nearly a 20% reversal from the situation at the end of 2021.  I think a lot of companies are kind of holding their breath in terms of financials.  We're not out of the woods yet.

But I do agree with you that the decade-long investment in technology and distribution is finally starting to pay dividends.  We're seeing real and tangible improvements in the process of buying life insurance that are long, long overdue.  It's easier to buy and sell life insurance than ever before and that's nothing but a good thing.

Overall, I'm always optimistic about our industry.  Life insurance is a unique financial product for which there is no substitute.  I believe that the more people understand what our products provide, the more they want them.  That's a great position to be in.

Marc:  Thanks Bobby!  Your insight and expertise are much appreciated by Windsor and the entire financial services industry.   Keep up the great work!   And as always we look forward to reading more of your independent, objective research and analysis at The Life Product Review.

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Thursday, 30 May 2024

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