For more than two decades any insurer increasing its cost of insurance (COI) rates on its universal life policies was likely to be met with policyholder lawsuits and even, occasionally, regulatory resistance. Until the past several years, these challenges generally have not ended well for the insurers.
By: Stephen Jorden, Steven Kass, Shaunda Patterson-Strachan, Waldemar Pflepsen Jr.
Carlton Fields, 24 February 2016

For more than two decades any insurer increasing its cost of insurance (COI) rates on its universal life policies was likely to be met with policyholder lawsuits and even, occasionally, regulatory resistance.  Until the past several years, these challenges generally have not ended well for the insurers.  Perhaps because recent judicial developments have been more encouraging, in the latter half of 2015 multiple insurers announced COI rate increases on diverse blocks of their universal life policies.  Judging from recent news reports, however, discretionary rate adjustments still can be expected to face a gamut of challenges, even though the increased rates do not exceed the guaranteed maximums contained in the affected policies.


These recently reported increases were met with swift opposition.  In November, two leading life settlement associations took steps which included sending complaint letters to nine state insurance departments about the rate hikes by four insurers.  This concerted effort undoubtedly reflects concern over the impact rate increases might have upon the value of substantial blocks of UL policies that have been amassed by institutional investors.  And, as reported earlier this month, the consumer advocacy group – the Consumer Federation of America (CFA) – sent letters to insurance commissioners across the nation regarding the COI rate increases by at least three of these insurers.  The CFA position (articulated in a white paper) implores insurance regulators to block rate increases when allegedly used to avoid UL policy guaranteed minimum credited rates of interest, and argues that COI rate increases should be restricted to demonstrated adverse mortality experience.

In tandem, the reactions of the life settlement industry and the CFA illustrate that COI rate increases continue to meet with stiff resistance.  Will formal regulatory actions or private party lawsuits in the form of consumer class actions, or individual or coordinated actions by investors, soon follow?

For more than 20 years Carlton Fields has counseled insurers and litigated numerous lawsuits against them regarding adjustments to COI rates and other nonguaranteed elements contained in their life and annuity products. 

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