Where is the Tipping Point?

We have talked in depth about the increasing GUL pricing over the last few months.  A recent review of either formal announcements or informal conversations points to most of the remaining changes occurring before the second quarter of 2011 is over.  Of course, anyone who has decent connections in our business knows this.  The real question is what else are the carriers doing to help drive sales away from GUL and over to current assumption products?

The answer to that question is a bit more complex, and varies from carrier to carrier.  One of the most concrete is a move by Aviva announced this week INCREASING cap rates and the corresponding maximum illustrative rates (more on this later).  Other carriers are also considering increases in crediting rates, all with an eye to creating the right "spread" between GUL prices and the other products.  The challenge is determining exactly what that spread is.  Too small and it will not pull sales away from the GUL products.  Too large a spread attracts too much business and profitability erodes.

So where exactly is the sweet spot or tipping point?  I think time will tell ultimately, but my guess is that these products need to be along the order of 10% less than the GUL before sales will really shift.  One of the more compelling strategies we hear is taking a lesson from the annuity markets and offering bonuses to entice people to give something other than GUL a look.  The end result is the same (lower premium) without a long term commitment to a high crediting rate.  Think about it from the carrier's perspective.  They can't invest the money at an effective rate of return.  Why not use it to create future cash flow?

Speaking of high crediting rates, let's circle back to the issue of increased cap rates and maximum illustrative rates.  In my eyes these are both a blessing and a curse.  Blessing in that the contracts in question will be flush with cash or can be minimum funded with very reasonable premiums.  The curse is what the future may hold if these rates are a temporary phenomenon.  If you have been reading the rant long you know that carriers will put product out with terms that are not sustainable in the long run in order to drive current premium volume. 

The strategy I recommended in dealing with those carriers was to keep our illustrations at the same reasonable rate, and capture the perhaps temporary increased rates as gravy.  That places us in the enviable position of exceeding client expectations and out performing the original sales illustration.  My position has not changed.  This shift away from GUL is going to make a more in depth investigation of Current Assumption UL (CUL) essential.  We will continue the discussion in the coming weeks.

Go get those year end cases done!