A new regulation requiring insurance companies to substantially increase
their cash reserves will, critics say, result in higher premiums and
shorter-term life insurance policies.
A new rule prohibits insurers from guaranteeing policyholders a single
rate for more than five years. Currently, insurers can write term life
policies for up to 30 years, locking customers into the same rate for the
duration of the policy.
According to the National Association of Insurance Commissioners, the Valuation of Insurance Policies Model Regulation –
dubbed “Triple X” — was enacted because of concerns over the potential for
insolvency in smaller companies. Advocates of “Triple X” say they are
worried smaller firms are selling policies that are too long for rates that
are too low, and therefore not maintaining sufficient financial reserves to
pay the inevitable claims.
As the nation’s oldest association of state government officials, the
NAIC reported that most states are ready to adopt the new rule after Jan. 1.
The organization consists of insurance regulators from the 50 states, the
District of Columbia, and four U.S. territories.
“This regulation is very important, since it concerns the required
amount of reserves that a company must maintain to be confident it has the
resources to pay future claims,” NAIC President and Connecticut Insurance
Commissioner George Reider said in a statement published by the organization
last March. “This regulation is needed because some insurance companies
currently are establishing low reserves to pay the commitments they are
making by selling certain life insurance products.”
“In addition, some assumptions about mortality rates have become
outdated,” Reider added.
A Prudential spokesperson confirmed to WorldNetDaily the company’s
planned implementation of the new rule, noting that, as far as she knew,
“all insurance companies” were implementing “Triple X” and that Prudential
had “already notified their policyholders by letter.”
Critics of the new regulation say that prohibiting insurers from writing
the longer policies will substantially increase consumer costs, because, as
a policyholder ages, insurers generally charge more to cover them. The new
regulation will force consumers to renegotiate policies much sooner, giving
the industry carte blanche when deciding rate structures.
David E. Fowler, CEO of ratemasters.com, an
Internet-based insurer, told WorldNetDaily that he understood the concern
over potential small company insolvency, but expressed doubt as to the
industry’s true motivation for “Triple X.”
Fowler believes the regulation came as a result of the larger insurers’
inability to compete with smaller, mostly Internet-based companies. Though
they “sold the NAIC on the concept of needing to protect consumers,” Fowler
thinks they were more interested in protecting their own bottom line.
“It’s not that the large companies aren’t also on the Internet,” he said,
“It’s just that because they were so big already, with much more staff and
much more overhead, it’s harder for them to compete” with smaller, leaner
insurers using the Internet as their primary sales tool. “They feel as
though they’re losing out, and this may be their way of leveling the playing
field.”
According to an industry report, the amount of term life insurance sold
via the Internet is increasing, and the figures represent a lucrative new
revenue stream for both big and small insurers.
The American Council of Life Insurance reports that over $3 billion in
term insurance will be sold on the Internet in 1999, and it expects that
figure to double to $6 billion by next year. The organization estimates that
a staggering 60 percent of all term insurance sales will be made over the
Internet within 10 years.
Nevertheless, Karen Eldred, spokesperson for the New York Department of
Insurance, told an industry publication recently that she believes the
increased financial stability of insurers benefits consumers.
“This regulation ensures that companies have the proper amount of
reserves to pay off claims and keep companies stable,” she said.
Tom Arifman, head of life insurance for Horace Mann, agreed, but said he
sees the cost factor as a downside as well.
“It is definitely a double-edged sword,” Arifman said. “On one hand, it
increases premiums consumers have to pay. Naturally, no one will like that.
On the other hand, it does increase the likelihood that companies will be
able to live up to their commitments, which may be even more important in
the long-term interests of the consumer, even if it is harder for them to
see.”
In the meantime, consumers can still purchase 20- and 30-year term life
policies before the new rule takes effect in their respective states. Fowler
said those purchasing policies before the first of the year “will be
grandfathered in” under the new rules.
“I’m just concerned that not enough consumers know about this change and
are going to be left with higher premiums,” he added.
