Imagine that you worked for a large company and the CEO announced that no employees
would be fired, but all salaries were to be cut by 50%. The overall level of productivity
would decrease at the company as the valued employees would leave and only those
without other options would stay. This is an example of adverse selection, which hurts
Recent actions taken by certain insurers will likely produce a similar phenomenon of
adverse selection, hurting the profitability of these carriers. As noted in a previous blog post, over the last five months several insurance companies, including Voya and AXA,
have announced increases to cost of insurance rates ("COI") for certain outstanding
universal life insurance policies. These increases, some which are in excess of 80%,
allegedly were made in part to address poor mortality results in the pool of policies
written by the insurance companies. In stark contrast, arguably smarter insurance
companies have not raised COI. In fact, New York Life has recently announced that it
will pay out the largest dividend in the company’s 150-year history to policy holders.
Like the hypothetical company referenced above, those healthy policy owners who can
apply for and obtain life insurance will likely sell or lapse their AXA and Voya policies
and purchase insurance from New York Life. Those insureds who are impaired and have
illnesses that would render them unable to purchase new insurance policies will keep the
policies and pay the increased COI.
So the healthy individuals with longer life expectancies, who are profitable to the
insurance carrier because they are less likely to receive a death benefit payout in the near
term, will leave. Those with illnesses, to whom a death benefit is relatively imminent and
who thus are not as profitable to an insurance company, will stay. Ironically, the very act
of raising COI by certain insurance companies will exacerbate poor mortality experience
by creating adverse selection. This could create a vicious cycle whereby raising COI
creates poor performance which then is used by the carrier to justify further COI
increases. At the very least, the contrast between insurance carriers who raise COI and those
who do not demonstrates the relative importance these carriers place on their profits
versus the value of its policy holders.
Meanwhile, if you are one of the seniors who has been notified of a pending increase in
your life insurance premiums, there may be better solutions than accepting a reduction in
your benefits or just surrendering the policy to the insurance company. One of those
alternatives is a life settlement, where a consumer sells the policy to a third-party investor
for an immediate cash payment. To learn more about this and other options available to
consumers who no longer need or can afford their life insurance policies, visit the “Life Policy Owners” section of the Life Insurance Settlement Association website.
About the Author:
Dan Young, CLU, ChFC, CASL, is the President of Magna Life Settlements, Inc., an
established life settlement provider focused on maintaining transparency, risk
management and rigorous process control in the purchase of life settlements. Magna is
owned by Vida Capital, a vertically integrated asset management company providing
longevity-contingent investment solutions to institutional and individual investors.
Young also serves as the Vice President, Asset Management, and General Counsel of
Vida. He is an adjunct professor of regulatory law at the University of Texas Law
School, Board Member and Chair of the Legal Committee of the Institutional Longevity
Markets Association (ILMA), Board Member of the Life Insurance Settlements
Association (LISA), and a frequent speaker at life settlement industry conferences. Prior
to joining Vida Capital, Young was the President and CEO of New York Life Insurance
Company’s Broker-dealer and Registered Investment Advisor. He graduated from
Stanford University with Honors and Distinction and from the University of Chicago
Law School with Honors.