Contingencies Online - September/October 2010

Have term life prices risen enough?

-8%

1%

0%

6%

-10%

-4%

1%

5%

-12% -10% -8% -6% -4% -2%

0% 2% 4% 6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 10/10 Male age 35, Preferred Plus, $500,000 20/20 Male age 35, Preferred Plus, $500,000

Annual change in term prices, 2001-2009

Notes: Term price indexes are computed based on the average price of the fifth- and tenth-lowest provider. 20/20 Male 35, Preferred Plus, $500,000 refers to: 20 year policy duration with a guaranteed premium over the entire policy duration for a man of 35 years with a sum insured of $500,000.

Source: Calculations based on COMPULIFE® data.

COMPULIFE® is a registered trademark of Compulife Soft ware, Inc.

After years of declining, US term insurance prices increased by about 5-6% in 2009. This dramatically reversed a 15-year-trend of sharp declines, with pricing falling by 19% between1995 and 2001, and another 10–20% between 2001 and 2008.

0%

-1% -1% -1% 0%

-3%

-1%

-5%

-1%

-2%

These price increases were necessary due in part to market pressures stemming from the financial crisis, which were aggravated by Regulation XXX’s requirement to hold reserves roughly twice what is economically necessary.

But have prices risen enough?

Life companies have a responsibility to price products in a way that is not only competitive, but sustainable.

There are several factors that life companies should consider when setting term prices.

First, although the state of financial markets has improved considerably in the past 16 months, market stresses remain.

For further information contact:
Swiss Re Life & Health America Inc.
175 King Street
Armonk, NY 10504

Second, in today’s market environment, US companies may be pricing term insurance too aggressively. A Swiss Re survey of the major markets found that for nearly every term product considered, the US has the lowest term prices. This is partially due to the highly competitive nature of the market.

Donna Kinnaird President donna_kinnaird@swissre.com or + 1 914 828 8111

Frank O’Neill Managing Director frank_oneill@swissre.com + 1 914 828 8504

Third, Regulation XXX will sustain a market dynamic through which demand for funding will continue to grow. We estimate that collateral requirements are $85 billion today and will rise sharply over the next decade, even if the industry moves to a principles-based approach (PBA).

Swiss Re Life & Health Canada 150 King Street West, Suite 1000 Toronto, Ontario M5H 1J9

Fourth, funding costs for bank letters of credit (LOCs), an important mechanism for funding life reserves, remain volatile. Credit spreads, a proxy for LOC costs, were nearly 260 basis points (bp) at midyear, several times their 50 bp level in early 2007.

Connie Walker Senior Manager connie_walker@siwssre.com + 1 416 814 2259

Finally, we believe that the industry should continue to work to expedite the adoption of PBA and that, with the need to create a sustainable business model in an uncertain market environment, term prices should continue to rise.