Systemic Risk - Universal Life Insurance

3.2 Universal life Insurance

  • (p10) - Because of the lowest guaranteed benefits that universal insurance provide, regulators and scholars widely discuss the potential systemic risk posed by universal insurance.

2020 02 -  Systemic Risk in China’s Insurance Industry, Society of Actuaries

  • L&H insurers with products that are highly sensitive to market movements—such as variable and fixed annuities, LTCI, and
    universal life insurance—are likely to feel the effects even more deeply.73
  • Interest rates are a key consideration for life insurers when estimating insurance reserves that align with their long-term policyholder obligations.
  • Through the discounting process, lower interest rates increase the present value of insurance liabilities, potentially leading to reserve shortfalls during statutory asset adequacy testing.74
  • Interest rate assumptions are also among the assumptions used to determine how much regulatory capital is required to be held for certain life insurance products.
  • Changes in interest rates may cause a mismatch between an insurer’s assets and liabilities, which could affect their regulatory capital requirements.75

73 Certain insurers use derivatives to mitigate interest rate risk. See, e.g., NAIC & CIPR, U.S. Insurers’ Derivative Exposure Increased 9% in 2018 (2019),
74 Although interest rates used in discounting reserves are prescribed under statutory accounting principles, life insurers must complete asset adequacy testing as part of their statement of actuarial review required in annual regulatory filings. Reserve adequacy is determined by calculating the difference between invested assets and the present value of future premiums, less the present value of future claims under various interest rate path scenarios.
See, e.g., American Academy of Actuaries, Asset Adequacy Analysis (September 2017),
75 American Academy of Actuaries, Report of the American Academy of Actuaries’ C3 Life and Annuity Capital
Work Group On RBC C3 Requirements for Life Products (September 2009), 4-6,

Discretionary Participating Features and Universal Life Contracts

  • In the IASB’s current view, policyholder participation rights consisting of dividends and excess interest credits for life insurers do not create a liability until the insurer has an unconditional obligation to policyholders.
  • A prior claim without an obligation should not be recognized as a liability; the amount expected to be paid in the future should be treated as part of equity. 
  • In assessing whether an insurer has a constructive obligation to pay dividends to participating policyholders, the IASB will rely on its Conceptual Framework and IAS 37, “Provisions,
    Contingent Liabilities, and Contingent Assets.”
  • This could potentially be a large issue for U.S. participating and interest sensitive life and annuity products, since current pricing takes into account expected credits to policyholders and not just guaranteed payment. (p5)

The current events should be a wake-up call to U.S. insurers, as preparation for managing under a current exit value approach can take several years. (p5)

2007 12 (Issue 71) - The Financial Reporter - Society of Actuaries

3.2 Universal life Insurance

  • (p10) - Because of the lowest guaranteed benefits that universal insurance provide, regulators and scholars widely
    discuss the potential systemic risk posed by universal insurance.
  • (p10) - The payments at expiration and the surrender value of life insurance industry reached 937.9 billion yuan in 2015 and rose to 1.2 trillion yuan in 2016. In the surrender value, high-cash-value products accounted for 55%. China’s insurance industry is expected to face more than 1.5 trillion yuan of maturity payment and surrender value by 2018 (Huibaoxian,
  • (p10) - Although a run on the insurance industry is rare, it cannot be ignored. Policyholders’ run once occurred in smaller insurers and in a normal economic environment, although what consequences it would cause in an extreme economic environment remains unknown. 
  • (p10) - Under the pressure of low interest rates in China, along with the regulation of government, China’s insurance companies will face a dilemma of both maturity payment and surrender value. It is necessary to prevent a run event; otherwise, insurance companies’ liquidity will be significantly affected, which will lead to fracturing of company funds in a severe case or even a financial crisis.
  • (p34) - Academia generally believes that life insurance companies have more risks than property and casualty insurers
  • (p34) - ... life insurers are more vulnerable to intra-industry crises because Mortgage-Backed Security (MBS) and leverage are more vulnerable than mortgage-backed companies.
    • ... due to the business model and business characteristics, life insurance companies are more
      at risk <than Property Casualty>
  • (p34) - With respect to NT <non-traditional> products,
    the investment guarantee products, and the universal insurance are all systematic trigger factors.

2020 / February -  Systemic Risk in China’s Insurance Industry, Society of Actuaries, (p12)

Even the creation of a simple product like a U.S.-style universal life insurance policy would have been difficult to accomplish with the computer power available in the 1970s.

  • The basic problem with the creation of these types of instruments is that, in many cases, even their creators did not have a complete understanding of the inherent risks; and their models were informed by parameters that, in some cases, were based on wholly inadequate historical experience.
  • Based upon various lawsuits that have been filed, adjudicated or settled, it is also clear that many purchasers of these instruments also had little understanding of the risks.
  • It would not be unfair to conclude that regulators also had less than a clear understanding of the risks. (p28)

2013 03 - Comparative Failure Experience In The U.S. And Canadian Life Insurance And Banking Industries From 1980 To 2010, Society of Actuaries - 48p