Since the first group of 10-year level-premium term policies (LT-10) began to enter the post-level term (PLT) period, many articles and presentations have suggested how carriers may optimize PLT performance. Typically these discussions focus on
PLT persistency. Only relatively recently has the industry addressed conversions.
The Society of Actuaries has published Phase 1 of a study on term conversions. Phase 2, which examines emerging mortality experience, is more challenging. Preliminary findings were shared at last year’s Annual Meeting.
In this article I examine SCOR’s experience with term conversions, with a strong caveat that mortality and lapse experience continues to emerge. Thus, as with the SOA report, the findings I share in this article are preliminary but may help uncover trends.
The Nature of PLT Rates
Level premium term life insurance issued 2000 and later fall under Regulation XXX and incorporate premium rates that increase sharply after the level premium period. In many of these policies the rate jump had a guaranteed maximum, though the company could use a lower increase. The typical increased premium is about 200%-300% of the Ultimate 2001 CSO. The average premium is about eight times higher than the level rate. Some policies allow jumps that can be 30 times or higher.
Lapse rates near the PLT for these policies were expected to be much higher than lapse rates of older products that had lower premium jumps. LT-10 products with a high duration-11 rate increase have experienced lapse rates averaging 90% or higher near the PLT. Lapse rates seem to correlate positively with both the size of the rate increase and with the insured’s attained age (Figure 1).
Figure 1 - Lapse Rates by Issue Age
Early experience on a group of LT-10 policies that persist beyond the level-premium term illustrate how quickly the lapse effect can be felt.
This association with attained age may have serious implications for premium income. Total PLT premiums are much lower than the estimate from a simple 88% lapse rate projection across all issue ages: Issue age 35 persists but has 75% lower premium rates than those for issue age 50.
Emerging PLT Strategies
To increase persistency, many insurers set new premium rates for durations 11+ on LT-10. Some companies linearly graded rates for 5-7 years, eventually converging with the guaranteed rate. While lower than the original jump, the increases are still substantial, with the duration-11 rate commonly jumping 2-4 times the level premium. Moreover, these premium jumps continue into durations 12 and 13 (e.g., duration 12 rate 6-10 times that of duration 10).
Figure 2 - Cumulative Lapses, Graded
|Age||Duration 10||Duration 11||Duration 12|
Even with a more moderate rate jump structure, cumulative lapse rates have a major effect on the product portfolio by duration 13. By that time, only 6% of policyowners in their 50s persist.
Persistency under this approach is high enough to provide significant premium revenue in durations 11-12 (Figure 2). However, a much smaller group persists into duration 13 as rates continue to climb. Selective lapses occur because, in most cases, renewal premiums exceed premiums for a newly underwritten LT-10 policy.
Conversion rates to permanent products historically have been less than ½ of 1% per year, and this rate remains common today through duration 8. Conversion options vary by company: some carriers do not allow conversion within 5 years of the PLT; others may permit conversions until the PLT; a few allow conversions after the level term.
Insurers offering conversion up to the PLT may experience much higher conversion rates in later durations (e.g., 9-10): 11%-15% or more of LT-10 policies inforce after 9 years may convert as the PLT jump approaches. For term products with a graded rate, experience so far indicates a moderately lower conversion rate of 8%-10%.
Converted policy persistency remains quite high, commonly with 85%-90% inforce 13 years or more after issue of the original LT-10 policy. Many examples reviewed for this article had duration 12+ lapse rates of less than 4%, similar to or lower than rates from UL policies in these durations. This appears to be consistent across all issue ages.
Premiums may be a key driver for converted policy persistency. Figure 3 assumes a jump and 7-year grading to 200% of the 2001 CSO as the guaranteed mortality rates. Illustrated conversion premiums are 90% and 120% of 2008 VBT.
Figure 3 - Comparison of PLT, Conversion Rates
|Term 7-yr |
(90% 08 VBT)
(120% 08 VBT)
For 45 y/o Male, Pref NT., $500,000 face Premiums for the conversion option are noticeably less than for PLT, even when applying a graded PLT pricing structure.
Conversion premiums are noticeably less than for PLT rates, even when applying a graded pricing structure: the 90% VBT has a lower premium in duration 14 than the graded premium for duration 11. In fact, the 90% VBT duration 11 conversion premium is close to $1050 for a LT-10 policy. (Figure 3’s 45 y/o Preferred Male is now 55.) The 120% VBT rate represents the pricing similar to conversion-specific UL.
Conversion rates of 8%-15% near duration 10 of LT-10 are significant and the premium required is relatively attractive to the policyholder. Assuming that some adverse selection influences conversion, it is possible that the premiums illustrated in the figure for converted policies may not cover associated mortality and other costs. In such a circumstance the extra cost should be factored in pricing LT-10, the conversion option and in financial projections.
PLT pricing can affect term life persistency. The combined effect of all terminations, including lapse rates and conversion rates, should be incorporated into projection models. If conversions are ignored, modeled PLT persistency and premium cash flows may be too optimistic.
The industry has only a few years of XXX-related PLT experience to analyze, and only with LT-10 products. SCOR’s Mortality R&D staff will continue to monitor business that transitions out of the level period and share our findings with clients.