Get ready, because there is almost certainly another round of price increases coming on GUL contracts. 

Why?

Simple.  Take a look at interest rates.  Carriers can't deploy capital at rates of return anywhere near what they need to in order to maintain profitability.  Need proof?  Take a look at IRR on death benefit at life expectancy versus treasury rates and corporate bond yields.  Need more proof?  How about John Hancock suspending sales on their Whole Life product because they can't possibly turn a profit based on the 5% guaranteed interest rate.  Not a pretty picture.

When we started to hear rumors of price increases being contemplated I decided to go to the source and interview an actuary to see if there was any insight he could provide into the current state of product pricing and policy design.

In some ways the answer was no, as there is really nothing new coming out of any carrier in the way of product design that goes beyond tweaks and adjustments to current products.  He did, however, point out one fundamental shift that his company is making in order to deal with the slings and arrows of outrageous economic fortune that the life insurance companies endure along with the rest of us.

That shift, targeted at GUL products, is to design systems that allow for more tactical price management in response to current economic conditions.  The analogy he made was to mortgage rates. While I don't think we are going to see insurance product pricing that moves as often as mortgage rates do (and neither did he), the idea of smaller, more frequent adjustments to price versus larger periodic shifts is something they are considering very seriously.  So seriously in fact, that the product corresponding to this strategy may hit the streets as soon as the first quarter of 2011.

Why is this change necessary on GUL products?  Simple.  The insurance company shoulders all of the economic risk on these contracts.  Who loses if the carrier does not realize an investment rate of return in excess of the IRR on the death benefit?  It sure isn't the client!  The biggest problem is short pay scenarios, with the single pay or large 1035 exchange being the worst of the bunch.  Of course, there is more to the profitability equation than this simple calculation, but I would consider this aspect rather foundational and the other variables secondary.  Don't get me wrong on this either - I am not crying the blues for the carriers by any stretch.  The fact remains, however, that this is the reality that we and our clients face.

So, what's the point today?  Re-read the first sentence above - prices are going up on GUL contracts.  If you have read the Rant from the earliest days, you will remember we have talked about this before.  Our response is the same today as it was during the last round of price increases earlier this year - the days of spread sheeting GUL products and picking the cheapest are over.  It is time to consider aspects other than the annual premium when making recommendations to our clients.

Enjoy your Friday.