CalcFocus

Rethinking Universal Life Policyholder Service – Inforce Illustrations Increase by a Thousandfold

Media attention, civil litigation and new regulations focus on problems facing policyholders of universal life. In many instances, policyholders are told the required payment amounts to keep their policies in force originally projected when sold are no longer adequate and much higher payments are required to maintain the benefits promised at issue. In other cases, policyholders learn their policies are in trouble when their policy values collapse, and they are presented with notice their policies will soon lapse.   

The underlying causes for the proliferation of troubled policies is well understood. Universal life emerged in the 1980s when interest rates, the foundation of universal life cash value growth, were at least high single digit throughout the decade and the 1990s that followed. The dramatic decline in interest rates in the early 2000s and especially after 2008 meant that universal life policy cash values grew more slowly and that insurance carriers who guaranteed a minimum 4% annual policy cash value growth, or higher, earned fewer profits. 


The decline in interest rates did not exclusively cause so many policies to become troubled.  Most successful civil litigation directed against insurance carriers and the new regulations from states like New York and California focus on carriers who adversely revised non-guaranteed policy elements, like annual cost of insurance rates. Prospective policyholders, on or before universal life policy issue, are delivered an illustration of future policy values. These illustrations project values under current assumptions at the time of issue that may include elements that are not guaranteed for the life of the policy.

Courts have concluded that some carriers adversely increased their annual costs of insurance, charging amounts closer to or equal to guaranteed assumptions, not based on “expectations as to future mortality experience,” but in order to gain back lost profits from declining interest rates.   

The new regulations from New York and California require notice and review whenever a carrier intends to adversely change non-guaranteed elements for policies issued in their respective state, including providing clear notice to policyholders that includes available strategies to minimize policyholder impact.  

Universal life policies that now require dramatically increased premium amounts are not all a result of carrier adverse changes to non-guaranteed policy elements or declining interest rates. Universal life, and other interest sensitive policy designs, are flexible premium products. The premiums illustrated at issue that were designed to achieve death benefit and cash value goals are recommended but not required. A policyholder may decide to pay less than the recommended payment or to skip one or more modal payments altogether when money is tight.  

In addition, the cash value that sustains policy benefits is potentially available when needed for other purposes via a policy loan. Policy loans may create additional policy value erosion if the interest due on policy loans is not regularly paid. New policy loans pay the interest that is due, when interest is not paid. This processing increases both total policy indebtedness and the amount of the loan interest due on the next policy anniversary.

Most policyholders are unaware of the long-term policy consequence when they reduce or skip a payment or when they take a loan against their policy cash values. They may understand that they will need to adjust future payments, or, at some future point, they may need to repay their loan balance and should pay loan interest until then. Too often policyholders only learn their policy is in arrears when they receive notice that their policy will shortly lapse. And, even then, the correspondence that notifies them only communicates what amounts are needed to minimally restore the policy to positive value. Revised premium amounts needed to achieve the benefits originally projected are rarely communicated.   

Recent CalcFocus customer engagements include work with carriers who seek new service strategies for their universal life and other interest sensitive life policyholders. These customers wish to enable compliance with new regulations, like New York’s Department of Financial Services Insurance Regulation 210 and California Assembly Bill 2634. Moreover, these recent customer engagement strategies include multiple, customized policyholder communications all purposed to identify policies that are in trouble and financial events that may aggravate policy problems. Their goal is to implement customized strategies to restore policies in trouble to “on track” trajectories.

What these new strategies have in common is they automate a thousandfold increase in the number of “as is” and what-if” inforce illustrations each customer creates – many times more than the volume of inforce illustrations each carrier had produced previously.

Inforce illustrations are governed by the same document that governs new business illustrations – the Life Insurance Illustrations Model Regulation (model #582). The section that deals with inforce illustrations is mostly within the discussion of Annual Report notices to policyholders. Following is the pertinent text: 

  • “If  the  annual  report  does  not  include  an  inforce  illustration,  it  shall contain the  following   notice   displayed   prominently: IMPORTANT POLICY OWNER NOTICE:  You should consider requesting more detailed information about your policy to understand how it may perform in the future.  You should not consider replacement of your policy or make changes in in your coverage without requesting a current illustration. You may annually request, without charge, such an illustration by calling [insurer’s phone number] or [insurer’s address] or contacting your agent. If you do not receive a current illustration of your policy within 30 days from your request, you should contact your state insurance department.” 
  • “Upon the request of the policy owner, the insurer shall furnish an in force illustration of  current  and  future  benefits  and  values   based  on  the  insurer’s present  illustrated  scale. This  illustration  shall  comply  with the  requirements  of  Section  6A,  6B,  7A and 7E.  No signature or other acknowledgment of receipt of this illustration shall be required.”

The model regulation requirements allow for a reactive model to inforce illustrations. Carriers may post the “IMPORTANT POLICY OWNER NOTICE” on their annual report documents and respond only to policyholders who request an inforce illustration. Many universal life carriers implemented a reactive model. They typically support a home office tool, often an EXCEL spreadsheet model, that can build inforce illustrations, often with significant manual steps in the construction process.  Actuaries and /or persons trained within the actuarial department often respond to inforce illustration requests.

The reactive model suffices because it satisfies the regulatory requirement and, primarily, because the demand is small. The CalcFocus team has interacted with multiple carriers who support the reactive model. The total volume of inforce illustrations they create annually is a fraction of the active inforce policy count. No need requires the inforce tool to have an automated connection with carrier policy administration platforms – skilled actuarial team users can research and extract current policy values from a variety of sources including capturing and copying policy administration screens. Performance is not an issue – the outside limit is a 30-day turnaround (although most reactive model carriers try to respond in 1 to 2 days).

How do the new service models differ from the reactive model?  Let us first consider universal life annual reports. Annual reports typically document important information about longevity of policy values into the future. They project how long policy values will remain in force if planned premiums are paid and if planned premiums are not paid under both guaranteed and current assumptions (or a subset of the four combinations). With the new service model, these projections are often calculated during annual report processing by automated inforce illustration service requests from the policy administration system. 

Suppose an annual report communicates that the policy, under current assumptions, paying planned premiums will sustain values until the second month the policy insured attains age 82. The original intent of the policy was to provide benefits until policy maturity. Communicating that policy values will no longer be available past age 82 identifies a problem without recommending any remediation strategy. 

The foundation of the new service models are inforce illustration solutions that can identify policies in peril and, based on recognition of the source problem, the new service models create one or more remediation recommendations, customized at the policy level, that can set the policy back “on track”. 

First, these new inforce illustrations must be service enabled to receive real-time policy administration platform requests and to return customized policyholder-ready documents for distribution or data elements needed by carrier enterprise document management to populate customized policyholder communications. 

Second, inforce illustrations under this model may need to orchestrate many inforce “as is” / “what-if” inforce illustration scenarios from a single policy administration illustration request based on robo-advice to create the customized remediation recommendations. The illustration scenario that is next in queue for a customized remediation recommendation may be determined by the illustration solution from the results of the last illustration scenario executed. Once we learn that policy values will no longer be available past age 82 if the policyholder continues planned premiums, and the policyholder has been regularly paying premiums, configuration rules for the next illustration scenario may be a “what-if” solve to determine what premium increase will continue policy values to endow at maturity followed by a “what-if” solve to determine what face decrease will continue policy values to endow at maturity continuing the same premium pattern. The logic that determines which illustration to run next, if any, will be very different if the illustration request communicates the policyholder has not paid planned premiums for some time or if there is any policy indebtedness.     

Third, inforce illustrations under this model must execute high performance. A CalcFocus team creates customized policy level annual report documents for one carrier that average 5 to 6 inforce illustration scenarios executed per policy. Some policy administration daily cycles request over 10,000 annual reports. Hence, the thousandfold increase over the reactive inforce illustration model. 

Fourth, the new service model works best when service requests are requested from the policy administration platform at multiple touch points. Our focus on carriers who have highly customized their annual reports to include remediation recommendations was emphasized because most CalcFocus engagements have included this touch point.   Some carriers have expanded the remediation recommendation scope to include requesting new documents or new data elements to populate documents for:

  • Pre-lapse communications 
  • Reinstatements 
  • Loan interest invoices 
  • Multiple modal periods with no premium payments 
  • Contemplated policyholder financial events like coverage increases, rider additions, death benefit option changes, and new loan activity  
  • Batch “health-check” audits and analytics 

Hence, again, the thousandfold increase over the reactive inforce illustration model. 

In sum, the regulatory requirement for inforce illustration allows for a reactive support model supported by manual-aided supply that typically results in low demand. Reactive policyholder support is becoming outmoded. This document identifies a trending  service model that is quite different.  Innovative carriers have requested CalcFocus implement at multiple touch points, service enabled policy administration platform requests that require the CalcFocus inforce illustration solution to analyze each request, and applying robo-advice, identify policies in peril based on the context of each touch point, and to execute sufficient “as is” and “what-if” inforce illustration scenarios to return a policyholder-ready document or data elements for carrier document population that present one or more recommendations to restore the policy to become “on track”. Because inforce illustration volume increases thousandfold when compared to the reactive model, high performance execution adds to the new service model’s requirements.

The universal life policyholder service model described herein is trending because:

  • “On track” policies persist 
  • The service model is designed to support multiple request contexts, including requests to satisfy legislation like the recent New York and California regulations 
  • Identifying and recommending  remediation strategies for policies soon after first warning signs creates more manageable policyholder options than allowing problems to compound
  • The service model mitigates litigation risk 
  • The service model is consistent with policyholder communication best practice – continuous transparency 

The CalcFocus team welcomes questions and comments on best strategies to service universal life policies whose values are not projected to achieve original policy holder’s goals. This blog presents one emerging strategy that CalcFocus believes will gain increasing traction.