Lapse Supported Pricing

[BNTRS]

There is some very important nuance here that is being ignored.

First and foremost, non-forfeiture products (i.e. cash value life insurance) is not lapse supported per se in the general actuarial sense of the term. That's not to say they absolutely do not exist.

The "loss" that an insurer faces for a non-forfeiture product that isn't lapsed isn't so much in the payment of death benefit since these products are mostly required to have reserves adequate to cover the death benefit. Rather the problem is in the rapidly increasing reserving requirements that come with age and the acceleration of the probability of death. In other words, the company is losing out on what it could do with the money because it has to hold onto more and more of it as part of the reserve.

And then there is reinsurance. This often wipes out any loss that could occur if the insurer faces a policy that does not lapse and instead pays a claim.

But also, and to be quite simplistic, if I have a whole life or universal life policy and I have a positive IRR on my premiums several years down the road and choose to terminate the policy and use the cash for something else, I don't know that I have necessarily lost. I don't have the death benefit, but there could very well be things that are not achievable since I have the cash and these things could be worth way more than the actual death benefit.

The company is happy, because the reserves that exceed the cash value it was holding onto are now released to do with whatever it wishes and I'm happy because I have my money to do what I wanted.

It's not a zero sum game as has been suggested. For true lapse supported products (level term insurance is the best example) it's extremely difficult if not impossible to "win" that bet.

 

[Deepsea]

I agree with your statement.

I think. But if everyone that had a whole life policy held them till death then obviously the dividend rate would be MUCH closer to the guaranteed rate----which is zero.

What percentage of whole life policies never pay a death benefit ?

 

[pcbinsurance]

"What percentage of whole life policies never pay a death benefit ?"
******************
Over 90% would be my guess.

 

[Deepsea]

"What percentage of whole life policies never pay a death benefit ?"
******************
Over 90% would be my guess.

Wow !

Keep it till you die. At least I will

 

[Cash]

I think. But if everyone that had a whole life policy held them till death then obviously the dividend rate would be MUCH closer to the guaranteed rate----which is zero.

Why would that be exactly?

 

[DHK]

There are three major factors that affect the profitability of life insurance companies:

1) Portfolio returns on the general account. This includes policy loan interest paid to the life insurance company on interest charged.

2) Favorable mortality experience (death claims, strict underwriting, and appropriate risk-based pricing).

3) New sales & premium. No new sales would have a negative impact on dividend performance.


What is the best way to help assure your clients to be on the 'winning side' of the life insurance equation?

1) Sell policies with strong guarantees.

2) Keep in regular contact with those policyholders, remind them of the guarantees that they have already paid for, and help your policyholders to keep their policy in force.

 

[houcoogster]

It's not a zero sum game as has been suggested. For true lapse supported products (level term insurance is the best example) it's extremely difficult if not impossible to "win" that bet.

Hollywood and the liberal agenda (Princeton) like to make all transactions out to be a zero sum game...we in the econ world call them "zero sum gamers".

Any time a transaction occurs both parties benefit otherwise the transaction would've never occurred in the first place (fraud excluded). The zero sum gamers would have you believe anytime someone is on the receiving end of money the other person is getting shafted.

On to the last point, No sane individual wants to "win" the term bet anyway, not the objective.

 

[Deepsea]

No one wants to die.

However it's going to happen, and all I am saying is that the current dividend rate or at least the profitability of all insurance companies is effected by either.....too many lapses in the first years which is very bad for the company.

However say take a vanilla while life policy on a 70 year old man that has had the policy for 20 years-----the company is much better off if he cashes in the policy rather than if he dies and collects the death benefit....or rather his heirs.

Why do you think life insurance companies do not like people selling their policies in the secondary market----the reason for that is that those policies premiums will continue to get paid until death...:which then throws off the companies actuarial calculations, and the company makes less money than they expected because they have to pay out more death benefit.

 

[houcoogster]

No one wants to die.

However it's going to happen, and all I am saying is that the current dividend rate or at least the profitability of all insurance companies is effected by either.....too many lapses in the first years which is very bad for the company.

However say take a vanilla while life policy on a 70 year old man that has had the policy for 20 years-----the company is much better off if he cashes in the policy rather than if he dies and collects the death benefit....or rather his heirs.

Why do you think life insurance companies do not like people selling their policies in the secondary market----the reason for that is that those policies premiums will continue to get paid until death...:which then throws off the companies actuarial calculations, and the company makes less money than they expected because they have to pay out more death benefit.

Gotta love the free market!

 

[scagnt83]

What percentage of whole life policies never pay a death benefit ?

According to a 2005 study by the Society of Actuaries & LIMRA it is 3.3%

I think. But if everyone that had a whole life policy held them till death then obviously the dividend rate would be MUCH closer to the guaranteed rate----which is zero.

That is not true. The longer the insured keeps the policy the longer they pay premiums. That is the name of the game; premium paying customers. That is what keeps the lights on and checks in the hands of widows.

I have no clue what study you read by Princeton. But your view of the profitability of Carriers is just not correct. Its the steady premiums that keep those large asset reserves in place, which in turn pay out minor percentages of the overall assets.


I do see why you have the thinking you do. But it is not sound from an actuarial standpoint.

Less than 5% of deaths come significantly before life expectancy. Which means the insurer can expect on average 20-40 years of premiums before paying a death benefit. Plus, not all 30 year olds are going to die the same year, same for 40/45/50 year olds, etc. The profitability numbers are not as cut and dry as you make them out to be, you forget that those 30 years of premiums have been earning interest and being leveraged by pooling them with other premiums. Money to use today is worth a hell of a lot more than money to use 30 years from now. (because you can put it to work)

With a non-participating WL policy the Rate of Return on the DB at life expectancy is very small.

With a participating WL it is larger (obviously it will depend on company and policy design)
But the important fact for the Par WL is that the CV RoR is usually not too much less than the DB.


But "lapse supported pricing" is a given. Actuaries take lapses into account for each and every product they do the numbers on.... its a basic fundamental of being an actuary and pricing insurance products.