Given the rapid rate of innovation in the modern era, it’s sometimes easy to forget that it wasn’t always like this – especially where life insurance is involved. In fact, for most of the 20th century, there was very little change in the design and structure of life insurance contracts.
Contracts frequently remained in place for decades and relied on manual record keeping for most of the last century. Manual record keeping made it difficult to build new products on other than a relatively simple basis, with minimal post-issue options available to purchasers.
“Values had to be tracked while the contract was in place and that was a laborious and administratively burdensome process in the days before computers,” says John McKay, Executive Vice-President and Actuary at PPI, a national insurance marketing organization. “As a result, there was not that much change in contracts because it was such a big deal to keep track of everything in that world – people had to do calculations by hand.”
It wasn’t until the 1970s that things started to change, and McKay attributes two key factors as leading to innovation in product design: rising interest rates and industry use of computer technology. Interest rates play a significant factor in life insurance pricing, and with rates going from 2.9% in 1950 to 12.5% in 1980, something had to give.
“This put increasing pressure on insurers to design products which allowed consumers to more immediately benefit from these higher rates,” McKay says. “This pressure reached a breaking point in the 1970s and 1980s. New contracts began to pass on the benefits of higher yields much sooner, and products continued to evolve because of that.”
The insurance industry was an early adopter of mainframe computer technology in the 1960s and 1970s. The long lifespan of insurance contracts, and the data requirements involved, forced the industry’s hand. As computer hardware and software technology advanced rapidly, the life insurance industry took advantage. The industry’s commitment to technology led to many industry innovations, including new money products, a wider variety of term products, universal life (UL), various COI (Cost of Insurance) payment options within UL, a wide array of investment options within UL, and a wide variety of post-issue options for the consumer, all of which were not previously available.
Another important factor around this time was the advancement in medical science and lab testing, which resulted in a more sophisticated life insurance purchasing process for clients. “Insurance companies could start to tell a lot about a person’s health after examining their blood and urine,” McKay says. “That enabled insurers to price risk more accurately and resulted in a reduction in prices for all types of products.”
Despite the vast improvements in a relatively short period, McKay believes there is still room for more innovation in the life insurance industry. Just as interest rates forced change in the 70s and 80s, McKay expects the sustained low interest rate environment of today to force insurers to re-evaluate the interest rate risk to which they are exposed. Along with further advances in technology and life sciences, McKay also highlights the new insurer capital regime (LICAT) and the pending IFRS reserve standard that is expected to come into force in 20210, as being significant drivers of change in the coming years.
“I think these environmental factors will lead to products and investment options that provide the customer with smoothed and managed returns,” McKay says. “Historically, this was the domain of par products but these features are becoming increasingly available within UL and other non-par permanent products. I also expect hybrid products which combine the best features of both par whole life and UL will continue to grow in overall importance in the market.”