A History of Discontinuations: Tracking the Trend

The recent trend of insurance products being taken off the shelves has captured significant attention in various circles, particularly regarding the life insurance sectorMost notably, life insurance policies that promise increased benefits over time, known as "Increased whole life insurance" or incremental whole life insurance, have notably been affectedSocial media platforms are abuzz with interpretations of this development, and the prevailing narrative suggests that insurance companies are under immense pressure, leading to a situation where they are “shy” about selling such products.

This snapshot of the industry, while somewhat nebulous, actually cuts to the heart of the situationThe recent spate of product rollbacks aligns with the regulatory mandate aimed at implementing “litreport and act as one (idiom); figact as one,” or “report and act in concert,” across the insurance sector.

So, what exactly does “report and act in concert” mean? Essentially, this regulation stipulates that the pricing assumptions used in product approval or filing with regulatory bodies must reflect the actual operational practices of the insurance businesses

In other words, an insurance company cannot present one narrative in its paperwork while engaging in distinctly different practices in the marketplace.

This stringent regulatory framework is aimed primarily at reducing the costs associated with the liabilities that insurance companies holdIn the context of life insurance, liabilities encompass critical obligations towards policyholders for future payouts, particularly in guarantees and benefits, making adherence to these new guidelines all the more pressing and impactful.

To understand the implications better, let’s dissect what we mean by liability costsThe core challenge lies in the obligations that insurers hold toward their policyholdersFor products that offer strong guarantees, there’s an ever-present risk of future payout commitments burdening the companyConversely, for savings-type products, insurers must be prepared to navigate the future obligations of returning value to their clients.

One efficient way to reduce these liability costs is straightforward: raise product prices

• VIX Calms Down: Is the Worst Over for U.S. Stocks?
• 50% Tariff Hike: A Heavy Toll on Chinese Firms in Mexico
• Alibaba Sees $40 Billion Quarterly Revenue Surge
• A Prosperous Landscape of Global Assets
• Nvidia's Market Value Surpasses $2 Trillion

Think about it—if a company initially commits to offering a 4% return to customers, it might adjust that figure to 3.5% or, even lower, to 3%. This iterative adjustment reflects a broader trend in the industry towards lowering guaranteed rates in tandem with market pressures.

The mandate of “report and act in concert” transcends product types in the life insurance realm, but none have felt its impact quite like incremental whole life insuranceThis product type is particularly susceptible to scrutiny because of its transparency and straightforward nature for policyholders.

Consider the situation from a fundamental perspective: guaranteed products will invariably face greater pressure in terms of payout obligations compared to their non-guaranteed counterpartsIncremental whole life insurance found its momentum around mid-2019, a time when annuity insurance was still operating at a relatively high predetermined rate of 4.025%.

However, as the industry evolved, regulatory measures were taken to mitigate risks associated with "carry loss risk" or interest spread loss

This refers to scenarios where the promised returns to policyholders exceed the investment returns earned on collected premiums, leading to substantial losses that could ultimately threaten the financial viability of insurers.

The regulations, which were implemented on August 30, 2019, dictated that all ordinary pension and long-term annuities issued from August 5, 2013, onwards would have their reserve evaluation rates capped at a more conservative 3.5%, replaced from the previous 4.025%. Other products experienced adjustments as well, but stability in certain policies remained a priority.

As the market witnessed the phased removal of the 4.025% long-term annuity products, incremental whole-life policies adjusted to a baseline of a 3.5% preset rate; however, by July 31 of the preceding year, that rate slipped further to 3%. The currents of the market indicate a longer-term downward trend in interest rates, characterized by fluctuations rather than a continual decline.

Despite the variability of economic conditions, it seems clear that long-term interest rates are generally headed south, implying that methods of profit generation from insurance products may not offer significant value post-regulation

Thus, timing the market becomes critical for potential investors looking to secure favorable terms.

Intriguingly, the most valuable asset of incremental whole life insurance lies in its ability to lock in interest rates over extended periodsThis type of life insurance assures stable growth over time thanks to fixed cash values, which remain impervious to shifts in the broader marketAdditionally, these aspects provide legal protections and higher safety, making incremental whole-life insurance an appealing option for those looking to maintain and grow their wealth.

However, this is just one chapter in a much larger narrative about guaranteed products in the insurance marketThe underlying reality is that these guarantees may become scarcer as the industry adapts to meet contemporary demands and trendsThe insurance marketplace is experiencing a pivotal transformation, and as evidenced by trends in mature markets overseas, it’s becoming increasingly common not to rely primarily on guaranteed products.

As the domestic insurance sector emerges from decades of tumultuous growth, a maturation phase is inevitable