Carriers Are Feeling the Impact of Negative Interest Rates
Without a doubt, carriers are under enormous pressure to maintain profitability in a low interest rate environment. Historically low interest rates over the last 10 years have pushed many carriers into a negative interest rate environment, meaning the money carriers invested in the open market cannot earn what they promised policyholders in contracts sold many years ago when yields were at 10%. Millions of universal life contracts, as well as interest-sensitive whole life policies, offered guaranteed interest rates of 4-5% and guaranteed cash value. Most of these older contracts are now paying the minimum interest rate guarantee (maybe 3%) and in some cases, carriers have raised their mortality rates to offset these losses. The impact on policyholders: their contracts are under-performing, which results in involuntary lapse or policyholders that outlive their contracts.
Policyholders Deserve to Know
The fact is, the only way to give a policyholder a present snapshot of the “health of their policy” is to run an inforce illustration. These new projections can give a client a good indication on how the policy values will perform at current assumptions. Doesn’t every policyowner deserve to know from their carrier today how future projections impact their financial expectation? There’s a problem though- most of the old illustration software that calculates these projections is sitting on old architecture and can’t scale. Why wasn’t this illustration software modernized on new infrastructure? The answer: because the majority of these products have been discontinued and are no longer sold through agents. Consequently, agents don’t need to access it. This software is usually used by the home office staff to satisfy an inforce illustration request from an agent or policyholder… and less than 1% of policyholders receive an inforce illustration each year.
Can the Course Be Corrected?
If most carriers’ inforce illustration software resides on Windows 95/98 machines, mainframes, or is hand calculated by actuaries, it’s virtually impossible to provide every policyholder with current projections each year. The solution simply doesn’t scale to educate existing policyholders on their policy performance.
Here’s what I mean by not scaling- Let’s say you have 500,000 policyholders on your inforce block and you want to give each policyholder an inforce illustration. That would be 500,000 inforce illustrations that the home office would have to manually run each year. Sound like it’s not humanly possible? Let’s look beyond this assumption.
Imagine the complete irresponsibility of simply telling policyholders that their policies are under-performing, and not providing them with ways to course correct. That alone would generate tens of thousands of calls from panicked policyholders into a carrier’s call center. So providing policyholders with options is a must. For example, can they reduce their face amount or add premium to extend the policy years farther into the future? We factored that it would take an additional 8 inforce illustrations for each policyholder to provide these critical options. You did that math correctly: this would mean running 4,000,000 inforce illustrations (500,000 policyholders x 8 illustration options each) to accomplish this task- daunting at best!
Why It Needs to Be Done…Now
Our industry has had over 6.6 billion dollars in class action suits over the last several years for improperly informing their policyholders of this ticking time bomb. It’s time we solve this problem. It’s our fiduciary responsibility as an industry to meet policyholder expectations.
We at iPipeline have a solution for this industry-wide dilemma- it’s innovative, avoids the financial burden of rewriting all of a carriers’ legacy inforce illustration software, and makes the task far more approachable.
I’m very passionate about this topic, and I’m looking for your thoughts as well.