Approaching immortality: insurers calculate how a new mortality table assuming life expectancy of 120 years would affect their reserves, pricing and products. (Cover Story: Life Expectancy).

By the end of this year, the National association of Insurance Commissioners may adopt a new mortality table for life Insurance that would have repercussions on the life business, but primarily would lower The minimum reserves companies would hold to back product guarantees.

The NAIC, the Society of Actuaries and the American Academy of Actuaries are working on the 2001 Commissioners Standard Ordinary Table, the first new one since the 1980 CSO Table that went into effect in the mid1980s. The 2001 table would reduce overall reserve requirements by about 20% to reflect mortality improvements. Required reserves would fall more sharply for business written on men than on women, on age brackets from 35 to 55, and for level-premium term policies than for whole life or level-premium universal life with cash values to age 100.

In a major change, the new table assumes insureds will die by age 120, up from age 100. The table would only minimally affect the life-settlement and long-term-care businesses, and it would have no effect on annuities, for which the NAIC adopted a new table more than four years ago.

How much the new table will affect the life industry's premiums, product designs or distribution, however, is a matter of debate. When the 1980 CSO Table came out showing a huge improvement in life expectancy, insurers scrambled to make changes in products and invent new programs. This time around, the industry is ahead of the curve.

"The technology is there for everybody to do their own mortality studies," said Paul Graham, chief actuary for the American Council of Life Insurers. If a company can't do its own studies, due to size or technology constraints, there are consultants who do mortality studies, and smaller companies can use the consultant data to make sure they're appropriately priced, he said.

Companies have been building their own mortality tables in-house for more than 10 years, Graham said. The new tables from the NAIC will affirm what companies have been doing and will affect their reserves more than their underwriting processes, he said.

"Mortality is only one factor in the pricing of our products, and our company strives to modify prior tables to reflect current experience on an annual, on-going basis," said Steve Douglas, region three underwriting manager for Woodmen of the World Life Insurance Society.

"We will certainly include the new information in an effort to look at our individual data, make minor adjustments to our standards and requirements if warranted, and continue to monitor our results, but we do not anticipate any sort of sea change to our current processes or methods," Douglas said.

New Life Products or Not?

"If you go back to the early 1980s, there were very high interest rates, and the huge decrease in mortality costs [was] just being recognized," Graham said. "The product design that took advantage of the new information was universal life. The combination of very high interest rates and reduced mortality made universal life a gangbuster product for those early 1980s. Then interest rates came back down, and the whole life writers adjusted their dividends, and everybody caught up.

"I don't see anything like that happening here," Graham said. "I don't see any product waiting in the wings for this lower mortality standard. You would think life insurance companies would be hailing the day a new lower mortality table was coming out, but they're very nonchalant about it, which leads me to believe the lower mortality is already taken into account in all the products they have in the market."

The new table may inspire some product changes.

In recent years, older people have begun insurance planning and financial planning, said Michael Batte, an actuary with the New Mexico Department of Insurance and chairman of the NAIC Life and Health Actuarial Task Force. A lot more people are living past age 100 now than were 20 years ago and therefore need insurance products later in life, he said. The industry is already trying to design those products, but tables that end at age 100--such as the 1980 CSO Table--limit the kind of design that can be used, he said. With the new tables extending to age 120, insurers have more flexibility to design products that meet the needs of the older population, he said.

As companies review their policies for reserve changes, they may begin to question whether they want to keep their minimum-size policies that low, said Jeff Marks, director of corporate owned life insurance and research with Northwestern Mutual. People make a lot more money now than they did in the 1980s when these plans were set up, and fewer people actually need the really small policies issued by some companies, he said. And the cost of issuing a policy is a fixed amount, no matter what the face amount is, except for the additional medical requirements as the face amount goes up, he said.

Reserves and Pricing

The significance of a new CSO table may be less in 2001 than it was in 1980, when the vast majority of business written was truly ordinary. "The traditional view is that whenever new mortality tables come out, there should be lower reserves and lower premiums," said Bob Holliday, actuarial manager in the Dallas office of accounting and tax firm KPMG LLP. "But the environment is different today than in 1980. Then we didn't have universal life [to the extent it exists today], Triple X and 7702." The latter is a section of the Tax Code that Congress passed in the mid-1980s to limit the amount of money contract owners can put into a universal life policy and still have it treated under the code as life insurance. The regulation's aim was to prevent people from using insurance products as tax-free accumulation accounts by dumping amounts into products far in excess of what was needed to provide the face amount's death benefit.

Holliday said he expects ordinary insurance products to have lower minimum reserves and slightly lower premiums. In universal life policies, the reserve is calculated differently than for whole life or term life. It is based on the guaranteed maturity premium and the guaranteed maturity fund, so that the required reserves won't necessarily decrease as a result of a new mortality table, he said.

On the contrary, the new mortality table might create some drawbacks for insurers, Holliday said. The table will likely decrease the expense allowances an insurer may claim, which in turn can limit a policy's surrender charge. A company depends on the surrender charge to recover certain costs if the policy is terminated early, so the new table may prevent a company from recovering as much of these costs as it can now, Holliday said.

While some may believe the new table will create another round of term insurance wars, Holliday said those companies already "aggressively and correctly managing" risks aren't likely to get into another pricing war. "But it will impact companies that have not been as aggressive," he said. In general, the smaller companies have been a little slower to engage in aggressive pricing because they don't have the resources of larger companies. "The small carriers are getting the reserve relief through reinsurance," he said. "They may get a better deal from their reinsurers. I don't see a major ripple, but there may be a minor one."

There has been a definite flight to quality lately, and the new mortality results will add to that flight, said David Evans, vice president of the Independent Insurance Agents & Brokers Association, a trade organization of agents and brokers across the United States. The insurers who are most adept at underwriting life policies will be most adept at using the new tables--therefore attracting more high-end consumers.

As long as insurance was considered a commodity, consumers were willing to do research on the Internet, Evans said. But the new mortality information will need to be explained to consumers, and they will turn to agents and brokers for that explanation, he said.

In the short term, people will want to talk to an agent, Evans said. The net difference for most consumers is that the premiums aren't going to look that much different, but the discussion will be based on the flight to quality, he said.

Reinsurance and Life Settlements

Reinsurers might see their booming businesses decline as ceding companies find less need for financial reinsurance--the kind they buy to avoid draining their surpluses for establishing reserves for new business. But the primary purpose of reinsurance is to spread risk, Batte noted.

Life-settlement companies are not likely to feel any immediate impact since they deal with policies already issued and in force. These companies buy policies insureds no longer want or can afford and collect the death benefit when the insured dies. The companies pay more than cash surrender value, and they also buy term life policies, which have no cash value.

Over the long term, however, policies issued under a new CSO table would probably be more attractive to life-settlement companies, and they might increase the number of policies appropriate for life-settlement purchases, Batte said. That is because lower required reserves would lower required non-forfeiture and cash values, which in turn might make it more likely settlement purchasers will perceive value in policies in excess of non-forfeiture and cash-surrender values. Nonforfeiture values are those in a contract that policyholders cannot forfeit even if they cease to pay premiums.

Administrative Problems

Changes wrought by a new mortality table may also produce an administrative headache for smaller companies. Larger companies are likely to have anticipated changes in their pricing, but smaller companies may have to change a lot in their policy forms, and there are fewer people at these companies to do the work, said Jack Luff, experience study actuary with the NAIC. "If a company has policy forms in several states, that's a lot of work," said Luff. "Big insurers are in more states, but they have a lot more on staff to handle the policy forms."

Some believe the new CSO table will present administrative challenges to most companies, regardless of size. Nancy Behrens, vice president, risk management, for State Farm Life Insurance Co., in an article published in the Actuarial Digest, Ponte Vedre, Fla., posed the question of whether CSO 2001 would amount to a "full-employment act" for actuaries. She said the new table would affect statutory reserves, cash values and tax reserves, and it would cause a re-examination of the definition of life insurance and modified endowment contracts. "Some talented and dedicated people worked on development of the table," she wrote. "We will need at least as many talented and dedicated people working on implementation."

New Reserves vs. Old Reserves

Basic reserves calculated using the proposed 2001 Commissioners Standard
Ordinary Table are only a percentage of the reserves required by the
1980 CSO Table. The charts below show the percentage required for
different genders, plans and ages, after policies have been in force 10
years. The calculations are aggregated results and assume that sales
levels increased at 5% per year.


Overall                          79.0%

Gender
Male                             76.5%
Famale                           85.6%

Plan

Whole Life                       85.6%
20-Year Level Premium Term       68.4%
Level Premium to Zero Universal  95.0%
Life

Age

25                               80.9%
35                               74.8%
45                               78.7%
55                               79.8%
65                               81.2%

Source: American Academy of Actuaries

Note: Table made from pie chart

RELATED ARTICLE: Building the Table

The National Association of Insurance Commissioners, the Society of Actuaries and the American Academy of Actuaries shared their tools, their resources and their expertise to construct the 2001 Commissioners Standard Ordinary Table. If adopted by the NAIC, the table will lower life insurers' required reserves and perhaps affect the industry in other ways.

The name of the table--standard ordinary--refers to the standard, ordinary business life insurers conduct. The mortality data used to construct the proposed table did not include simplified-issue life business or guaranteed-issue business, nor did it include any separate mortality table for preferred-risk classes.

As a first step to the proposed CSO table, the Society of Actuaries developed the 2001 Valuation Basic Table, which reflects improvements in mortality over a 20-year period. In the VBT, the society incorporated mortality experience it collected annually from 1990 through 1995 as well as data from other sources for young and old ages, where the experience data was otherwise sparse. It then projected its mortality findings to the year 2001 using recent mortality improvement trends. For the 1980 CSO Table, the society used data from 1970 through 1975.

The proposed 2001 CSO table calculates reserves by adding margins, or "loadings," to the VBT to make it more conservative and ensure that reserves cover not just the expected, but claims that might exceed the expected, said Michael Batte, an actuary with the New Mexico Department of Insurance and chairman of the NAIC Life and Health Actuarial Task Force. At the direction of Batte's task force, the loads overall were about 15%.

If the NAIC adopts the CSO table in December as anticipated, states would be in position to put the model regulation into effect. States would implement the new table either by statute, by regulatory action or through a letter issued by the state insurance commissioner, Batte said. Companies would have at most until Jan. 1, 2008, to implement the table. States would realistically want to adopt the table as quickly as possible since lower reserve requirements could lead to lower prices, and insurers will want to compete, Batte said. Assuming the NAIC acts in December, Batte predicted most states would adopt the new CSO table next year, while others would adopt it in 2004.

Mortality improvement in the Valuation Basic Table tended to be greater for men than women and people younger than 45 years old or older than 85. The biggest improvement was in men 55 to 80 years old, a group that averaged a 1% annual mortality improvement for 1990-95 over 1970-75. Annual mortality improvement for women in the same age group averaged 0.5%.

Since the society's 1990-95 mortality experience database had no data above issue age 72, limited data for attained ages over 85, and limited data for juveniles, the society's task force used data from other sources. The society engaged John M. Bragg and Associates Inc., for a special mortality study. It also used data on men from the U.S. Department of Veterans Affairs' National Service Life Insurance program, which covered millions of servicemen from World War II.

The society also made adjustments for improved treatment of AIDS in people 20 to 30 years old. The society reported a spike in deaths of more than 100% in this age group in the 1990-95 Basic Mortality Table as compared with the 1975-80 table. Its task force noted in its report on the construction of the 2001 Valuation Basic Table, however, that the spike was attributable to excess AIDS deaths, and that these results "overstate the impact of AIDS today."

Ron Panko

Insurers Use Different Table for Annuities

For annuity buyers, improving mortality is not the kind of good financial news it is for life insurance buyers. Longer lives mean lower periodic payouts for those looking to buy payout annuities.

The good news for buyers is that annuities won't be affected by the proposed 2001 Commissioners Standard Ordinary Table because annuities fall under the guidelines of their own table, the 2000 Annuity Mortality Table, adopted two years earlier by the National Association of Insurance Commissioners.

Annuity 2000 became the table required by the Internal Revenue Service for tax reserve calculations in 1999, said Cindy McGovern, valuation actuary for Lincoln National Life Insurance Co. That was the year 26 states adopted the table so that it became the prevailing statutory valuation table. The final two states adopted the table this year. The table was named 2000 because the creators wanted to show that it was looking toward the new millennium.

Annuity 2000 is unusual as mortality tables go in that it has features that allow insurers to project mortality improvements into the future, said Michael Batte, chairman of the NAIC life and Health Actuarial Task Force and actuary with the New Mexico Department of Insurance.

The previous individual annuity mortality table was dated 1971.

Batte said that only five years ago people could have bought larger income streams than they can today with the same money, but improving mortality has had only a little to do with that.A much bigger effect stems from considerably lower interest rates, Batte said.

But lower payouts won't necessarily hurt the industry because investors have learned the value of products that offer reliability and stability, Batte said. When the stock market was returning 20% to 30% a year, the 5% to 6% returns offered by payout annuities didn't look very good. But after more than two tumultuous years in the stock market with declines in some sectors of more than 70%, returns in the middle single digits look much better.

Not many people have bought payout annuities or annuitized deferred products. In 2000, they collectively invested only about $7 billion in payout annuities, according to the American Council of Life Insurers. Because of the nature of the product, purchasers of payout annuities tend to be "super' healthy," said Batte. "They wouldn't buy annuities unless they were pretty sure they are going to live a long time," he said. Hence, the industry's mortality table for annuities assumes longer life spans than those in the life insurance table. Batte said that even in 1971, the table's terminal age was about 15 years greater than that in the life insurance table.

Does that mean people owning deferred annuities for 20 years or more have a good deal locked in if they convert to a payout stream? Not likely, said Batte, because the payout guarantees in older contracts are probably quite conservative. Even with improving mortality and lower interest rates, insurers today would probably offer payout terms better than the guarantees in those contracts because they would compete to retain the invested money, he said.

Moving Into Payout Phase

So far, the effect of the 2D00 table on pricing of annuities has not been uniform in the industry, said Lorry Stensrud, executive vice president in charge of annuities at Lincoln National. Some insurers have priced conservatively, while others have priced aggressively. "Only 1% or 2% of annuity owners annuitize now," he said. "I'm not sure how much attention companies are paying to their payout rates." But as baby boomers in the United States move out of their accumulation phase and into retirement income, insurers expect to see more annuitization. "When that starts to happen, you'll see insurers focus a lot more on immediate annuities--on the underlying payout rate, on new creative designs, and especially on the fixed side, a focus on what kind of assets are supporting those products," said Stensrud.

Over the long term, it is the larger companies that will be more affected by the new annuity table because they, rather than smaller companies, are spending time and effort on the payout business. "We think the payout business will be bigger than the deferred accumulation business," said Stensrud. "It's just a matter of time before that happens."

Like many large carriers, Lincoln has devoted its resources to product innovation on variable annuities. That's because there's a 40% chance one married spouse at age 65 will live to be 90, Stensrud said, and the couple will need some portion of investments in equities to maintain their spending power.

There is nothing unique in the 2000 annuity table, however, that should lead to a rash of new products, said Batte. Product innovation of the past few years, which largely involved the so-called "unbundling" of product parts so that insurers could offer consumers features they want and avoid features they don't want, were not driven by the table, he said. "I don't know that we'll see any more innovation in products, although the insurance industry can be creative when it sees a for a product," Batte said.

In constructing annuity tables, regulators and actuaries try to make sure companies reserve enough money to cover their obligations by adding a cushion of 10% to 15%, said Bob Holliday, actuarial manager at the Dallas office of KPMG LLP, an accounting and tax firm.

Ron Panko

Medicare Taxed by Longer Lives

Although health insurers won't use the 2001 Commissioners Standard Ordinary Table and the underlying mortality tables the same way life insurers do, the tables will likely verify a significant reason medical costs are going up--people are living longer. As a result of that trend, along with low reimbursements from the government, Medicare has become a tough business for insurers.

While the tables are the main driver of life insurance, health insurers will probably be less affected by the results, said Tim Robinson, a consulting actuary for NiiS/Apex Group Holdings Inc. Health insurers are usually conservative in their financial planning and have probably already made similar assumptions by the time the tables come out.

In addition, the impact of aging on insurance is a phenomenon the industry has been watching for a while. Health-care costs are rising at a record double-digit pace. A May American Association of Retired Persons report said Americans are living to an average age of 80, nine years longer than in 1900. Between 1977 and 1996, average total health-care spending in the United States per person rose 310% for people 50 and older, nearly twice as fast as general inflation. Higher rates of obesity and chronic conditions for the older set, are contributors.

Not only are Americans using health services more often, they're racking up the bills for prescription drugs at a much faster pace. Drug spending accounted for 15% of total health-care costs in 1996, but only 6% of the costs in 1977, the AARP report said.

The trend is straining the entire health insurance industry, but it's especially affecting the Medicare system, which covers people age 65 and older, And despite the steep rise in costs, government reimbursements to insurers that offer Medicare programs have failed to keep pace. On average, insurers have received a 2% increase in reimbursement rates since 1998, but President Bush has included a 6.5% increase in his budget for 2003, said Susan Pisano, a spokeswoman for the American Association of Health Plans.

The difficulties with the system are causing some insurers to exit the Medicare business or pull out of some markets. Rates vary from region to region, based on a method adjusted for average per capita cost that changes for each county, Robinson said.

Because reimbursements haven't kept pace with medical costs, PacifiCare Health Systems Inc. is reducing benefits, said spokesman Tyler Mason. The company's Medicare+Choice membership declined 20% in the second quarter. Last fall the insurer said it would withdraw from some counties in six states.

Others that have announced exits from certain Medicare+ Choice markets include Aetna Inc., Anthem Inc., Blue Cross & Blue Shield of Florida, Health Net Inc., Texas Health Choice L.P., UnitedHealth Group and Well-Cor America.

Meanwhile, an effort in Congress to reform Medicare with a prescription-drug bill has been stalled. Before leaving for summer, recess, the House passed a Republican-backed prescription-drug plan that would provide a prescription-drug benefit, but U.S. senators, have been unable to agree on a plan. Also, a Republican bill would open Medicare+Choice to competitive bidding as a way of resolving reimbursement issues.

Addressing the pharmacy aspect is important, said Charles Berg, president and chief operating officer of Oxford Health Plans, but health-care cost trends need the most attention.

Oxford has about 60,000 Medicare members and would like to grow its business, he said. But if reimbursements don't keep up with health-care cost inflation:, it will be difficult for Oxford to provide the service in the long term.

"It's really a question of looking at the health-care cost trend and comparing it to the reimbursement trend," Berg said. "If they pull too far apart from each other, you lose your ability to serve those members. That's really the big issue. Anything else is incidental."

Marie Suszynski

LTC Insurers More Concerned With Morbidity

Long-term-care insurers expect the new mortality tables to show people are living longer, but what's also vital to their insurance line is that the quality of those longer lives has improved.

That's one reason some long-term-care insurers don't expect the 2001 Commissioners Standard Ordinary Table to have much bearing on their product.

On the surface, it would seem that longer lives mean more claims--people needing to collect on long-term-care coverage for more years. That's been an expectation in the industry, but some studies have shown surprising results, said Loida Abraham, second vice president of retail, long-term care, for John Hancock.

Abraham points to a study on trends in improved mortality by Duke University, which examined whether people living longer were living in a disabled state or in a healthy one. "The answer would have a significant effect on long-term care," she said.

So far, results show that morbidity is improving with life expectancy, she said. The study speculates that quality of life is improving because the public is paying more attention to living healthy lives.

Even before the new tables come out next year, John Hancock's pricing assumes people will live longer, Abraham said. While that could mean mote and longer claims, the potential for higher prices is offset by morbidity improvement. "We're seeing fewer claims than expected," she said. "This is based on actual claims experience to date, and it's continuing."

New York Life has made changes to its long-term-care product, "But I don't know if any are particularly related to people living longer," said Dennis O'Brien, vice president and long-term-care actuary with the company.

A new benefit-increase-option rider, which provides a way to fund increases in benefits over time, could be viewed as a change related to people living longer, he said.

"We continue to try to find benefits that will differentiate us and add value," said Ken Grubb, senior vice president with New York Life's long-term-care division. "It's important people have a provision in their benefits to keep up with the cost of care."

New York Life believes this option rider is so unique that it filed a patent for it, Grubb added.

But this product innovation is not tied to new mortality tables. "I don't think New York Life would be changing any current products in response to what we think might happen with life mortality tables," said O'Brien, who also noted the industry is seeing improved morbidity.

GE Capital is more interested in morbidity than the life mortality tables, said spokesman Carl Dombeck. Mortality tables may not directly reflect the company's client base, and they're only used as a guide, he said.

"We hear morbidity is improving," Dombeck said. "That's a good thing. If you factor that in, it could offset higher rates that could come with longer lives and more claims."

Malcolm Cheung, vice president of long-term care at Prudential sees a tie between mortality and long-term-care premiums and reserves. The longer someone lives, the more likely that person may come down with a chronic condition that may require long-term-care services. "So mortality and life expectancy do impact the cost of long-term care and the demand for long-term-care, services," he said.

Cheung said he didn't expect the new life mortality tables to lead to new products, however. The tables may only have an impact on price and reserves. "We have to make assumptions based on how quickly people will die. When they die, we wouldn't be paying claims. As life gets longer, we have to increase our premiums and reserves," he said.

The National Association of Insurance Commissioners doesn't have any formal standards for setting the basis wouldn't for long-term-care reserves, and companies have to use the new life tables.

Different companies use different standards. For example, Prudential uses the 1983 Group Annuity Mortality Table and Individual Mortality Table, respectively, for its group and individual long-term-care policies. These tables already reflect a lower-than-average mortality rate, he said.

If the new CSO table shows a significantly lowered mortality, then long-term-care actuaries may compare and review their own pricing and valuation, but there's a question of whether they would be forced to or not. "My interpretation is we would riot be forced," Cheung said.

Dennis Kelly

Mortality Improvement Trends

To develop the 2001 mortality tables, the Society of Actuaries Task Force explored mortality improvement in both insured and noninsured populations, using various sources. Based on sources, the following observations were made:

* Mortality improvement has tended to be larger for males than females.

* Mortality improvement has tended to be smaller at attained ages under 45 and at attained ages above 85.

* Annual mortality improvement for males aged 55-80 is in the range of 1% for Social Security and Federal Civil Service data. Insured experience is somewhat higher.

* Annual mortality improvement for females aged 55-80 is in the range of 0.5%.

* In some studies, female mortality has deteriorated in recent years.

Source: Society of Actuaries