Disintermediation

When a policyholder feels deceived, the disintermediation potential is enhanced.

-- ALLEN D. BOOTH

1982 - UNIVERSAL LIFE UPDATE, Society of Actuaries (rsa82v8n34) - 26p

...disintermediation:  That is, the decline of the life insurance industry as a savings medium.

Disintermediation occurs:

  • through lapsation, increasing policy loan utilization,
  • the continuing shift towards term insurance
  • as well as a wave of product replacements within the industry itself.
  • It also occurs with a substantial opportunity cost as new savings dollars are being invested in other media.

--  WILLIAM R. BRITTON, JR

1983 - INDIVIDUAL LIFE INSURANCE, Society of Actuaries - 22p

Individual Products

  • The most important feature of the new individual products was the unbundling or separation of the fund accumulation from the mortality function.
  • In this way the consumer could be shown his or her fund and the earnings credited to it as a separate element.
  • Universal life and a variety of variable life and annuity products were the chief vehicles in this effort.  (p4)

The key risks for these products were the spread risk and the potential disintermediation risk in the event they were surrendered in response to interest rate changes.

  • Traditional life company management structures were not well suited to managing these risks. (p5)

-- NAIC Testimony - Terence Lennon, New York Department of Insurance [PDF-p]

1991 - GOV - THE IMPACT OF JUNK BONDS, REAL ESTATE AND MORTGAGES ON THE LIFE INSURANCE INDUSTRY

  • 1983 - DISINTERMEDIATION, INVESTMENT STRATEGY AND PRODUCT DESIGN, Society of Actuaries - 22p
  • 1982 - PROGRAMS TO CONSERVE TRADITIONAL LIFE INSURANCE POLICIES - 18p
  • There is a disintermediation risk for carriers when policyholders are educated through updated illustrations when their policies go off track

2016 - Assurity White Paper - NAIC LIBG WG

We are seeing a real crisis in confidence:

  • That, in my mind, is probably the worst thing that could happen.   
  • There is not a company in the country that can stand runs that Commissioner Weaver was talking about, where people ask for $1 billion in policy loans and surrenders in a 2-week period.  (page 13)

--  William McCartney - Director of Insurance, State of Nebraska and Vice President, National Association of Insurance Commissioners (NAIC)

1991 - Government Hearing - Regulation of Insurance Companies and the Role of the National Association of Insurance Commissioners (NAIC) - 286p

  • A large disintermediation risk can occur when interest rates rise and the market value of assets supporting policies with book value guarantees become materially less than the guaranteed surrender value.
  • One way to eliminate, or reduce, that risk is to offer individual life and annuity products which utilize a market value adjustment formula in determining cash values.
  • However, until 1985, book value cash surrender values were required on individual life and annuity policies in the United States.

1986 - MARKET VALUE ADJUSTED PRODUCTS, Society of Actuaries - 34p

Since 1975 there have been drastic changes in economic stability, accompanied by higher interest rates than most of us imagined possible at that time.

  • The changes included rapidly increasing withdrawal rates, decreased market values of assets, and disintermediation.
  • As a part of this new world, there has been increased use of flexible products by life  insurance companies.
  • These products separately identify interest credits and charges for various risks and expenses.

--  THOMAS J. LEARY

1984 - FINANCIAL REPORTING FOR NEW GENERATION LIFE AND ANNUITY PRODUCTS, Society of Actuaries - 22p

When we give the liabilities a quick checklist, I would recommend the following:

  •  First and foremost I think is the disintermediation risk. You need to look at the financial and psychological deterrents that contract holders have to surrender their contracts.
  • Obviously a very important factor is the prevailing interest rates in the market for comparable products and for other financial instruments in general.
  • Obviously we cannot operate in a vacuum.
  • Historically credited interest rates to policyholders, particularly the existing level, is a substantial consideration.
  • Any "expectations to policyholders that may have been created."
  • The past experience for the product and how that relates to the original pricing assumptions is also needed.
  • Product specific characteristics including embedded policyholder options in the program.

1988 - REPRICING CONSIDERATIONS -- IN FORCE BLOCKS OF BUSINESS, Society of Actuaries 

  • The option to surrender a life insurance policy exposes insurers to macroeconomic activity that may result in disintermediation and possible financial distress.

2013 - AP - An Empirical Analysis of Life Insurance Policy Surrender Activity, David T. Russell, Stephen G. Fier, James M. Carson, and Randy E. Dumm