USAA is cutting the rates on their new life insurance policies. Let me explain why in less than
1800 2000 words– but it’s all good.
I’ve learned a lot about insurance over the last 30 years, and it’s a necessary evil. We buy it to help ourselves (and our families) recover from disasters, and we only keep it as long as we need it.
Everyone knows a story about someone who was devastated by a personal catastrophe which destroyed their finances.
It seems all too easy for it to happen to you. Most people have a poor understanding of probabilities and statistics, and it’s surprisingly difficult for even an experienced actuary to estimate the risks. You want to be protected against all of the bad things that can happen in life, and it’s all too easy for the industry (with insurance agents) to use fear marketing.
A short history of selling life insurance
Life insurance traces its roots back over two millennia to Roman centurions who contributed to a pool of money for the legion’s burial expenses. American insurance companies appeared in the 1700s (mostly for the Atlantic shipping industry) and early American churches insured their preachers. By the mid-1800s every responsible wage earner was expected to carry life insurance to protect their surviving family. (A few of today’s large insurance corporations can trace their founders back to the 1850s.) Insurance marketing ramped up after the Civil War, and after WWI everyone was accustomed to buying life insurance to provide for their survivors.
Insurance is the ultimate feel-good product to help you sleep better at night, and you hope that every penny you spend on premiums is “wasted”. You never want to have to file a claim.
This month I dug deep into our periodic review of all of our insurance coverage and its expenses. (That’s a continuing saga for another post. Somebody should write a book.) In the middle of this analysis I was pleasantly surprised to see an announcement from USAA that they’re actually lowering their life insurance rates.
Humans are all still going to die someday, but the good news is that the insurance industry has kept too much money in reserve to pay for claims. They’re going to charge less for the coverage.
(By the way, if you’re not a USAA member then please keep reading. USAA sells life insurance to everyone, not just military members and veterans. The whole life insurance industry is permitted to hold lower reserves now, but some companies have more advantages at controlling their expenses and setting their rates.)
New rules for claims reserves
The logic behind holding lower reserves is a concept called Principle Based Reserving. The industry has worked on this for nearly a decade and it’s gradually achieved national recognition.
I was skeptical about the idea of letting a company hold lower reserves (remember the financial crises of the Great Recession?) yet this has been a slow evolution of a national standard. The PBR rules are easier to audit (and enforce) and they’re easier to match to specific risks. Insurance companies will have simpler rules to follow across the country (instead of a patchwork of state laws), and larger companies can spread their fixed expenses across a wider group of customers.
It all sounds great, and I really want to believe. My concern is that some insurance policies (like long-term care insurance) have taken decades to show their weaknesses. It’s all too tempting for corporations to undercut each other on price (for market share), underestimate their risks, and end up holding too little money for claims. The good news is that PBR has survived regulatory scrutiny in 46 states and has slowly been adopted nationwide. Hopefully, the surprises (there will be surprises!) are small and easily handled.
USAA offered me a chance to ask their head actuary about PBR. (I like talking to actuaries because they can do math and they know a lot about risks. If they were in the military, they’d be running Navy nuclear reactors.) I spoke with Shawn Loftus, USAA’s senior vice president and chief actuary, and learned a lot more about how PBR will be enforced.
USAA was one of the leaders in working out the PBR rulebook. Mr. Loftus says that their financial reserves for life insurance claims will follow three layers of protection. The most basic formula provides a “one size fits all” floor that can be easily audited by state insurance commissioners. A second layer of reserves applies to policies that the company underwrites for riskier clients who are smokers or who have medical/physical issues. The amount of that reserve depends on the demographics of their clients. A third layer of reserves is designed to change with “fluctuating economic conditions”, which are mainly interest rates. This reserve amount depends on the company’s expenses and their portfolio returns.
The problems with premiums
Expenses and returns have been an issue. During the PBR rollout, insurers have surveyed their clients about their attitudes toward life insurance. Although most Americans agree that life insurance is necessary, only 60% of survey respondents actually carry a policy. (USAA’s records show that a third of its members– including me– have no life insurance at all.) Mr. Loftus says that 80% of Americans feel that they’re wasting their money on it, and that’s usually a good thing. (In other words, most families lived their lives without the unexpected death of a wage earner and the loss of their income.) People paid premiums for decades to protect their survivors’ income against something that never happened.
To make matters worse, life insurance reserves have been under financial pressure for over a decade. Most insurance companies hold their reserves in bond portfolios, and most of the assets are investment-grade corporate or municipal bonds. Yet bond yields have dropped steadily for over 30 years, and the last decade has had the lowest interest rates that my 83-year-old father has seen in his entire life. It’s hard for insurance companies to earn enough money to boost their reserves.
While we clients may despise wasting money on premiums, insurance companies have to earn enough profit to stay in business. With dropping portfolio yields, insurers are forced to cut expenses or raise premiums. You can already predict what happened to the market share of the companies which raised premiums, so we’ll shift our focus to the companies that are cutting expenses.
Mr. Loftus says PBR analysis shows that most insurer’s reserves are too high. It also means that USAA was holding too much money in reserve to pay potential claims on life insurance policies.
The first (minimum) floor of PBR reserves ensures that the company can pay their clients’ claims. The other two layers allow insurers to vary their reserves to optimize the earnings on their bond portfolios and the underwriting on their riskier policies. Mr. Loftus mentioned that USAA will continue to use some traditional reinsurance for excessively concentrated risks (like a $5M policy on one person). However, unlike the Great Recession’s bond markets, there’s no fancy financial engineering or obscure collateralized debt products.
Just like many other life insurance companies, the smaller reserve requirements mean that USAA can reduce their rates. Better yet, the company is owned by its members and doesn’t have to pump up its financials for Wall Street or the stock market.
The rate reductions are happening now, but only for new policies written after 2016. Mr. Loftus expects USAA to reduce rates in 46 states by a small amount (2.6%) with reductions of at much as 15% in some states. The other four states (NY, MA, WY, AK) are expected to roll out their version of PBR over the coming years.
What happens next?
Yeah, you know I immediately asked about dividends or rebates on existing policies.
Sadly, the answer is “No.” Those prices have already been locked in to the premium on older policies, and the PBR reserves just mean that USAA is less likely to lose money on claims while waiting for their bond portfolio yields to improve. There’s no pressure for rate increases on existing policies, either.
The good news is that the new reserve rules mean that the company is financially stronger. USAA is going to invest some of their extra funds in cutting their underwriting expenses. As most USAA members already know, that means they’re rolling out more features in the mobile app. It’ll be easier (and faster) than ever to figure out your insurance needs and to buy a policy. You can still ask questions of the call center, but you might not have to.
USAA has already issued its first PBR policy through the app. It went to a deploying servicemember who received their approval on the same day that they applied for the policy. (Deploying members are eligible for expedited underwriting.) They also added on a severe injury benefit rider of $25K for any additional expenses of medical recovery and any modifications to their home or vehicle.
The new policies also include a “future insurability rider” for deployments. If you insure your life for a base amount with USAA and later separate from the military, you can boost your USAA insurance to offset what you’ve lost from SGLI. In effect, USAA is offering the same type of guaranteed insurance as VGLI– only at much lower prices. The caveat is that you have to buy this insurance while you’re on active duty (in addition to your SGLI).
What can you do about your existing insurance policies?
The new PBR rules are in effect for life insurance, although they could someday be applied to any type of insurance policy. USAA is implementing its PBR tiers on its level term policies and on a few universal life policies that have secondary guarantees.
Auto & property insurance continue to use their own reserves calculations systems. (After I finish my review of our other Ohana Nords insurance, I’ll post an update on that.) USAA does not sell long-term care insurance directly, although they work with other insurers for their clients who want a policy through USAA. Traditional long-term care insurance still has its own crippling flaws, although I’m encouraged by newer hybrid life-insurance policies that carry a long-term care insurance rider.
Your existing premium rates were locked in when you bought your term life insurance policy, so a member trying to find a new, cheaper policy should review their insurance needs with USAA. Be aware that term insurance premiums rise with age and declining health. The premiums on the new policy will be lower than buying them last year, but your older age (and possibly declining health) might mean that those premiums could still be higher than any reduction in rates from PBR.
Mr. Loftus suggested that everyone holding an older term life insurance policy should review how much life insurance they need, and then contact USAA. Use the mobile app to estimate your needs and your PBR rates, or call them for a quote on your current coverage at the new PBR rate.
Postscript: USAA checking accounts
As this post went on the schedule, I got an e-mail from USAA’s Communications team:
“We wanted to give you a heads up of a change that will is happening in our members’ USAA Checking Accounts. USAA is changing the name of the USAA Secure Checking account to USAA Classic Checking. The reason behind this is simply that as USAA looks to add additional checking accounts options, the name change helps members make more informed decision on which checking account is best for them. There are no changes to the terms of the account (which includes ATM rebates, no monthly fees and no minimum balance).”
My USAA checking account already has the new name, and yours might too. If you’ve edited the name of your checking account then your edits should still be there. Otherwise, the account’s terms & features are the same.
I’ll keep an eye out for exactly what “additional checking account options” USAA is planning to roll out. I’ve heard from a few readers that it’s a very attractive pilot project rolling out later in 2017.