Breaking down life insurance

Ever been approached by an insurance agent who offered you insurance that you never really understood? I'm sure it happens a lot. More often than not, we get insurance because of the following reasons: the insurance agent is a good friend, and we didn't want to turn him down, or we thought it was an investment. So let's try to give the low down on some basic concepts about life insurance.

There are two major types of life insurance: ordinary life (OL) and variable unit linked (VUL).

Ordinary life insurance. There are two types of insurance products that are classified under OL: traditional life insurance and endowment.

For traditional life insurance, living benefits come in the form of cash surrender values and/or dividends. Cash surrender value is the monetary amount that you would get in case you surrender your life insurance before the policy's maturity. Usually cash values start accumulating by the third or fourth year.

Thus, it will take a while before the cash values grow bigger than the total premium you are paying for. Policy owners can also take loans from cash values of their OL policies. Dividends, meanwhile, are the nonguaranteed cash benefits given to policyholders depending on the insurance company's performance.

The cheapest type of traditional life insurance is a term insurance where one is covered for a certain period of time or up to a certain age only. Term insurance has no cash values nor is it participating in any dividends distribution. However, term insurance can be converted to a traditional life insurance.

Aside from the traditional life insurance, endowments are also classified as an OL product. Endowments are different from traditional life insurance in that after paying premiums, you can periodically receive cash benefits after maturity. It is a good tool for forced savings. Returns are guaranteed but interests in the returns are most often lower than inflation.

OL products also have nonforfeiture options in case you'd like to surrender your policy before maturity and different settlement options for claims.

Variable unit linked. VUL insurance products are probably the most famous insurance product these days. A VUL is an insurance product with an investment component. It is like a term insurance and a mutual fund combined into just one product. Similar to OL, there is a fixed minimum death benefit or face amount. However, since VULs have an investment component, the death benefit can grow as your investment grows.

Unlike OL products, VULs don't have cash surrender values nor dividends. In VULs, a portion of your premium buys you units which have equivalent value called the Net Asset Value per Unit (Navpu). The Navpu changes on a daily basis, thus if you multiply your units by the Navpu, you will get the actual value of your investment or the account value.

A policyholder can regularly add to their investments to their VUL on top of the premium they are paying. These additional investments are called top-ups.

Usually, there are three types of funds where you can invest in: equities fund, balanced fund or bond fund.

Since these are investments, the returns you can get are not guaranteed, but you can potentially earn from 4 percent to 15 percent annually from your investment. Policy owners can also withdraw a portion of their investments but can incur withdrawal charges usually within the first five to 10 years depending on the product.

Note though that even if some VULs are considered limited pay, cost of insurance will still be deducted from your account values. It is advised to make regular top-ups so you won't deplete your account values. Once the account value becomes zero, the policy lapses.

For both OL and VUL, one can also have additional coverage that is called riders. Every insurance product can have different riders. These riders can come in the form of additional insurance coverage for death via accidents and disability due to accident, waiver of premiums in case of disability, critical illness coverage and a lot more.

Having insurance is an important aspect of personal finance and understanding the different types of life insurance products is just one step in picking the right one for you. In case you already have one, it might be a good idea to review its features and see what type of insurance you got. In case you're looking for one, remember that the key to picking the best insurance product for you is making sure it addresses your needs and is aligned to your goals.

Source: Manila Times

IC now requires public registry of insurance agents

The government has mandated insurance firms to establish a public registry of their sellers and agents in a bid to boost consumer protection on various financial products.

In a circular letter, the Insurance Commission (IC) is requiring all companies authorized to sell life insurance products to set up a publication registry of licensed insurance agents.

IC commissioner Reynaldo Regalado said this is part of the government’s moves to ensure that appropriate mechanisms are in place to protect the interest of consumers of financial products and services.

“This is also to institutionalize consumer protection as an integral component of corporate governance and risk management of financial service providers,” Regalado said.

Under the Insurance Code, no person can act as an insurance agent unless duly licensed by the IC.

The IC noted the importance of providing the public with the necessary information about the people they are dealing with especially in terms of insurance products.

As such, insurance companies will be required to establish and maintain a registry of their respective insurance agents duly licensed through the Enhanced Licensing System of the IC.

The registry, which shall be updated on a monthly basis, will give the public access to information about the sellers such as complete name, license number and type and validity of license, among others.

According to the IC, every insurance firm must provide a consumer hotline for responding to requests for verification of the status of insurance agents included in the registry.

Further, the IC will have the authority to impose enforcement actions for failure to comply with the mandatory registry.

The IC can impose penalties or fines for non-compliance with the mandatory posting, incomplete posting and incorrect data, as well as suspend licenses to engage in businesses.

The IC is giving insurance firms up to three months to establish and publish the registry of licensed insurance agents.

Source: Philstar

The uninsurable world: what climate change is costing homeowners

Rising premiums are a de facto ‘carbon price’ on consumers as extreme weather events become more frequent

Michael Heffner had owned his detached house a short drive from the seafront in Virginia Beach, on the US east coast, for exactly one year when his home insurer abruptly cancelled coverage.

“They just dropped me,” says Heffner, a US Navy officer. “There was no, ‘Hey, do you want to stay on with us if we charge more?’ Nothing.” 

Scrambling to find a new insurer, he found his existing premium of about $1,200 a year impossible to replicate. Instead, he received quotes ranging from $2,000 to $3,200. 

Chelsea Stoffen, a middle school teacher from Virginia Beach, was also ditched by a large insurer, despite being with them since 2016. “They gave me one month’s notice,” says Stoffen. “I was freaking out because I felt so rushed.”

Local insurance brokers say they have seen a big jump in calls from homeowners in search of cover as companies pull out of certain neighborhoods. “A lot of people are hurting right now, rates are going up and up,” says Kevin Torcia, a broker at Goosehead Insurance in the area.

Last year was the worst he had seen “in the last 15 years, easily”, he adds. Torcia helped about 70 jilted customers shop around for home insurance, up from a dozen the previous year.

Heffner, Stoffen and millions of other homeowners worldwide are on the front line of an insurance affordability crisis. Global warming is making extreme weather events such as storms, floods and wildfires more frequent and severe, and therefore increasingly difficult for the sector to cover.

As firms exit some areas and demand higher premiums in others, affordable home insurance cover — for many an essential annual outlay, often a condition of their mortgage debt — is getting harder to secure.

The global picture explains why. A run of four consecutive years when overall insurance losses from natural catastrophes have topped $100bn, previously the mark of a remarkably bad year, has spooked executives.

In the US, a repricing of risks has sparked a significant rise in premiums. Several big US insurers, including State Farm and The Hartford, have paused their underwriting of new home policies in the state of California. A significant factor has been a sharp rise in the cost of property catastrophe reinsurance, or insurance for insurance companies.

European executives also warn that insurance prices will have to rise after a series of extreme weather events on the continent. In Australia, the biggest yearly price rise in two decades left 1.24mn households facing “home insurance affordability stress”, up from 1mn the year before, according to the country’s Actuaries Institute. 

Residents in Virginia Beach examine the damage after a tornado last year. Some in the insurance industry say the sector fell behind in anticipating the impact of climate change © Stephen M Katz/The Virginian Pilot/TNS/Getty Images

All this is adding greater urgency and attention to a challenge long predicted by environmental activists: that climate change will make parts of the world uninsurable.

Senior industry executives are now unambiguous in making a link between man-made global warming and the insurance affordability problems. “This is the first time we actually bring a climate change bill back to the consumer, if you think about it,” Christian Mumenthaler, chief executive of Swiss Re, one of the world’s biggest reinsurers, told Davos delegates in January.

Rising insurance premiums were a kind of carbon price on consumers, he said, with higher costs resulting from “us living the way we’ve been living”. He added: “But of course [consumers] don’t like it and the politicians don’t like it.”

Insurance executives frequently highlight how the sector has modelled climate risks for decades. But speaking privately, some senior figures say the industry fell behind when it came to understanding the threat to affordability from climate effects.

“The insurance industry had its head in the sand around climate change,” says the chief executive at one big insurer, speaking on condition of anonymity. “It’s a gigantic pain and it tried to avoid it. It will spend the next few years [looking at it] and it will figure out how to do things better.”

Last year saw a  record-breaking number of natural catastrophes causing at least $1bn in insurance losses: 37 separate events, according to data from insurance broker Aon.

That included 25 so-called severe convective storms, of which 21 were in the US. It is the growing weight of events such as storms and wildfires — and the broadening of the areas that are exposed to them — that is raising anxiety in the sector, and changing the way risk is viewed.

Virginia, for example, is not a state renowned for massive natural catastrophes. But high winds and flooding have long been a feature. As global warming shifts the Earth’s meteorological patterns, supercharging drought and rainfall, it is one of many areas where insurers are pulling back.

Severe thunderstorms are the kind of event that insurers traditionally labelled “secondary perils”, since they do not bring the massive loss of an earthquake or hurricane.

“We no longer can call such events secondary,” says Ernst Rauch, chief climate scientist at Munich Re, the world’s biggest reinsurer by premium revenue. “They have reached in the aggregate the order of magnitude of a major hurricane, or tropical cyclone, or winter storm.”

Looking at its data over decades, there is “a significant upward trend” in the US and Europe of such claims, Rauch adds, even accounting for inflation in rebuilding costs due to things such as labor and materials becoming more expensive. The science “explains very well” that the heat and moisture in the atmosphere leads to higher frequency and intensity of such thunderstorms, he says.

Some executives in private partially put some blame on the risk-modelling companies the insurers lean on to forecast losses, saying that the effects of climate were underplayed.

A rescue team in Florida searches for victims following Hurricane Ian in 2022. A repricing of risks in the US has led to a significant rise in premiums © Win McNamee/Getty Images

The dramatic pullback in the reinsurance market after years of underperformance has added to the urgent sense among insurers that they must reprice.

The cost of property catastrophe reinsurance cover, which they use to share the burden of natural disaster claims, is at its highest in a generation. Reinsurers have also sharply raised their so-called attachment points — the level of losses that need to be reached for the reinsurance to kick in.

That has left more risk with primary insurers. Dean Klisura, head of reinsurance broker Guy Carpenter, told analysts in January that attachment points “did not come down” in crucial turn-of-the-year negotiations and that continued to “expose [insurers’] balance sheets to attritional volatility”.

Such a trend could test the sector’s limits, some say. If yearly losses stick above the $100bn level, and firms are forced into further price rises and pullbacks to protect their balance sheets, it could “harm the whole proposition of the insurance sector to society”, says one reinsurance chief executive. There will be growing “patches” where buying insurance is uneconomical, Swiss Re has predicted.

While shareholders apply pressure on companies to bolster their profits, politicians are insisting insurers keep cover available. “The increased risk of disaster events due to climate change no doubt poses a significant hurdle for insurers across the country, however, it is an unacceptable outcome to leave millions uninsured because of shifts scientists have been predicting for decades,” Democratic Congresswoman Maxine Waters wrote to the US federal government last year in response to the California departures.

In some areas, the question of whether the private insurance sector alone can handle the cost of extreme weather has already been answered. In the US, UK and other countries, a patchwork of state-backed insurers and national reinsurance schemes means that the taxpaying public is already sharing the cost of these risks.

The numbers of households supported by such schemes is ballooning. Florida’s state-backed insurer of last resort, Citizens, stood at 1.2mn policyholders at the end of last year, up from less than 450,000 in early 2020. Homeowners supported by California’s pared-back Fair Plan more than doubled between 2018 and 2022, surpassing 270,000, in response to worsening wildfires and cancellations by traditional insurers. The UK’s Flood Re reinsurance scheme stood behind more than 260,000 home insurance policies last year, up from 150,000 back in 2018.

The optimistic view in many parts of the industry is that private sector provision will rebound. A combination of rising prices, investment in catastrophe prevention measures and regulatory reforms will — especially if lower loss years are experienced — allow insurers to take back more customers. Private insurers did recoup some policies from Florida’s Citizens in recent months.

But global regulators and policymakers are preparing for a more frightening future. Uninsurable properties could spill over into other areas, warned the Bank for International Settlements in a November paper, by making mortgages harder to secure and increasing banks’ credit risks if homes are no longer eligible collateral. 

Strong winds and waves destroy parts of a boardwalk in Atlantic Beach, North Carolina, in 2018. Climate change is expected to add to the volatility in the insurance sector © Chip Somodevella/Getty Images

The Bank of England warned in its 2021 climate survey that, in a scenario of governments failing to act on climate and global warming reaching 3.3C above pre-industrial levels by 2050, about 7 per cent of UK households currently covered would be forced to go without insurance due to unavailability or expense. In Australia, one in 25 homes will be in effect without cover by 2030, according to the Climate Council, an independent advisory body, which has said the country is “fast becoming an uninsurable nation”.

“You are seeing increasing numbers of people [globally] not insured because they cannot afford the premium,” says Mia Mottley, prime minister of Barbados. “And it’s not just people. You’re seeing it with businesses and at some point it’s going to become an issue with respect to access to and quality of their loans.” Under-insurance is a vast problem in the island nation; 95 per cent of those affected by 2021’s Hurricane Elsa did not have insurance.

Industry executives tend not to dispute that global warming is making extreme weather more frequent and severe. But there is strong debate over whether that is the significant factor driving up home insurance claims in recent years, rather than spiraling rebuild prices and other inflationary effects, as well as more building and settlement in at-risk areas.

In the US, the situation is more acute because home insurers typically need to get their pricing signed off by local regulators, making it more difficult for them to charge prices that they deem commensurate with the risk. Insurers have explicitly linked their departures from certain areas to the need to be able to price for expected losses.

There are various legislative efforts at state level to improve operating conditions, such as legal reforms aiming to deflate claims costs.  

Storms caused havoc to properties in Virginia Beach last year. Global warming is making extreme weather events more frequent and severe © Billy Schuerman/Getty Images

Policymakers are also giving the problem more attention. In November, the US Treasury for the first time requested granular data to assess the “increasing impacts” of climate change on household finances, citing “insurer pullbacks and significant premium increases in several states”. At the same time, two senators launched an investigation into how insurance companies are navigating climate risks, including asking firms for five-year forecasts of premium rates and inquiring whether they are considering exiting any markets.

Senior industry executives fear that the relationship between insurers and regulators is weakening. Whether companies are pricing fairly is an important and long-running discussion between the parties. Eric Andersen, president at New York-listed broker Aon, says the relationship “is breaking down more and more”.

The question now, say industry experts, is not whether governments will have to step in, but how much further they will have to go.

Already, a lot of tail risk is sitting with governments that have obligations to stand behind the various and growing local and national programmes. Australia has launched a public scheme to absorb some cyclone-related risks. Some politicians and industry figures have called for the US to adopt a federal-level insurance backstop for climate risks.

The UK’s flood reinsurance scheme is due to expire in 2039, but increasingly executives expect it will have to continue beyond that date. Last year the scheme’s then chair said that government spending on flood defenses would have to go “further and faster”.

As what’s considered a normal year continues to be more expensive, how does that new normal continue to be priced in?

The affordability crisis has society-wide impacts, from where people choose to live to where they decide to retire. Growing costs are “having effects on the valuation of properties, the stability of markets, it’s having all these downstream implications,” says Steve Bowen, chief science officer at reinsurance broker Gallagher Re. “There are discussions now about where people are going to retire. Are they [still] going to Florida?”

The nature of insuring extreme weather is that losses from natural catastrophes will continue to ebb and flow. Climate change is expected to add to the year-to-year volatility. But experts say what matters most is the long-term trend. “As what’s considered a normal year continues to be more expensive”, says Bowen, “how does that new normal continue to be priced in?”

Insurers themselves stress both their societal role as a financial shock absorber for extreme events such as a natural catastrophe, but also their responsibility as prudent companies not to underprice those risks.

Prevention measures such as banning new homes on floodplains and investing in defenses against floods and wildfires may be the only viable way of reducing the threat.

Increasingly the challenge of insurance affordability becomes a “policy question”, says Aon’s Andersen. “Do you support people that can’t afford the risk-based price? Or do you change [planning rules] so that you can’t build in certain areas? Those are not questions that are going to be solved by insurers.”

Source: Financial Times