Company Profiles: Principal Based Reserves

Right-Sizing Life Insurance Reserves

How USAA’s long sought after regulatory changes help improve the customer experience

by Shawn Loftus & Sean Scaturro

Mr. Loftus is SVP and chief actuary and Mr. Scaturro is director of life and health advice with USAA.
USAA a fully diversified financial services providing products and services to the military community.

April 18, 2017 — For more than a decade, USAA Life Insurance Company (USAA) has supported an effort of political and regulatory change that would make life insurance more available and affordable for its members, the men and women of the military community.

Principle Based Reserves (PBR), a newly approved method of calculating statutorily required life insurance and annuity reserves, focuses on the unique risks of the insurance products that each life insurance company offers. The new law and accompanying regulation seek to right-size the reserves based on the level of risk involved, which is in contrast to the old one-size-fits-all reserve standard.

The new system also imposes new, robust reporting requirements on insurers and allows regulators to take action when an insurer’s reserves appear to be too low. In USAA’s case, that means holding lower but sufficient reserves on new level term policies. Technical terms and function aside, the bottom line is that USAA is passing those savings on to its members in the form of lower prices on new level term products. The new products offer premium reductions to new policies of 2.6 percent on average, with some reductions reaching 15 percent.

USAA is a fully integrated financial services company, offering solutions for banking, insurance, investments and financial planning needs. The association’s mission is to facilitate the financial security of its members and families, and it does this by taking a global look at each of the financial decisions that its members make. Adequate life insurance coverage is foundational to a sound financial plan. But many USAA members, like many Americans, live on tight budgets.

Making life insurance more easily consumable and attainable for customers will continue to be a goal for USAA and the life insurance industry.

They consistently point to price as a major consideration when shopping for life insurance coverage for their families. Life Insurance and Market Association (LIMRA) found in a recent study that Americans overestimate the cost for life insurance by more than two to three times. Consequently, many people needing life insurance are potentially avoiding the conversation because they feel like they simply cannot afford it. USAA hopes that lower prices will encourage its members to re-examine their life insurance needs and take action to help protect their families and loved ones.

Working with the Regulators and Law Makers

For many years, the reserves that USAA and many other companies were required to hold for level term life insurance were far higher than was economically necessary. Companies struggled to finance the needlessly high reserve burden. USAA felt that the true positive impact to the consumer wallet would be felt by right sizing the reserve requirements.

In 2005, USAA began its effort to push for such a change by providing testimony to a special session of the National Association of Insurance Commissioners. USAA then worked with other companies, trade associations, professional organizations and regulators to outline what would eventually become the model for PBR. For USAA, PBR was always about preserving the affordability and availability of its members’ life insurance product of choice, level term insurance. After more than a decade of work by industry and regulators, the principle based reserves method was put into effect January 1, 2017. As of the new year, USAA already has a PBR compliant term insurance product in market in more the 40 states.

New rules could benefit the military

With the regulatory changes in place, USAA can not only continue to maintain its strong financial position, but it can continue to innovate in the product realm. USAA’s unique military market requires different solutions than most civilians. USAA offers a free military future insurability benefit1 on its term coverage, which allows a service member to purchase additional term coverage at the point of military separation or retirement, helping to replace their Service Members Group Life Insurance (SGLI). Military occupations inherently are more risky than most civilian jobs and present different considerations from an underwriting perspective; however, most military occupations are still able to acquire the most discounted premium rates with USAA. With the new regulations in place, the country’s service members may be able to get the valuable protection their family needs at a new lower cost.

Life insurance calculators and planning tools are critical in consumer education

Life insurance is a challenging topic for consumers, with technical terms and perceived hoops to jump through. Many people are confused about the type of coverage and the amount needed for their financial situation. Nearly four in 10 consumers that say they have life insurance, have it only through their employer and likely the amount of coverage their group policy offers is marginal compared to what their financial situation would call for. With so many Americans under-insured or not insured at all with life insurance, the financial hazard that looms for most families is significant. While it is ideal for families to have adequate coverage for things like their liabilities, replacing lost income or paying for future goals like college education and final expenses, having some coverage is better than not having any.

A quick internet search may provide several recommended calculators or tools that consumers can use to educate themselves on how much insurance their family needs or to understand how different products work; the challenge for the industry is to find and produce a coverage recommendation that can reduce the initial knee-jerk reaction that can come when the numbers are seen as too high. Americans currently have uncovered life insurance needs of approximately $15 trillion, which could be attributed to potential cost barriers for those that think they cannot afford to buy adequate coverage, or potentially due to consumers not considering financial risks outside of their immediate debt.

USAA’s Life Needs Calculator strives to make a comprehensive and technical conversation into a consumable recommendation. The digital tool illustrates the insurance recommendation through iconography, showing a picture and numeric value like a home with its associated mortgage. This presentation helps USAA’s members draw a more tangible picture of how their insurance will help provide for their loved ones. It also helps to educate the user further into why their insurance need includes more than just current debt; ultimately USAA’s members can tailor their insurance policy amount to find the happy medium between right amount and affordability.

Streamlining the application and underwriting process

Applying for life insurance can be an intimidating process since it typically includes providing personal financial and physical health information, and potentially blood and urine. If buying a car required an invasive screening process, a thorough interview of a person’s ability to drive and take care of a car, and ultimately a decision on whether that customer could even be allowed to buy a car that arrived a month or two later, the demand for public transportation would be through the roof. There is a need, and thankfully a growing trend of innovation, to reduce the time to underwriting decision and final contract approval.

Many insurance carriers are finding creative ways to leverage data, looking at comprehensive decision making algorithms that have a high correlation with the expected health and lifestyle of a customer. These new underwriting techniques are allowing some companies to issue life insurance coverage immediately. While these techniques are still in their infancy and are yet to be time-tested, insurance companies are looking at other means that can produce the same immediate impact result of quick coverage decisions.

USAA uses special underwriting considerations for military members that are nearing a deployment. On January 1, 2017, USAA issued its first PBR compliant term policy to a young military member. The member was able to complete his quote, application and underwriting questionnaire electronically and because of his upcoming deployment, was approved for coverage immediately. A significant amount of USAA’s membership does business through its website or mobile application, allowing the company to provide seamless transactions and quick turnarounds on decisions. Offering a more convenient life insurance acquisition process can only help more consumers to secure coverage versus potentially falling out of a longer, challenging process.

Getting more Americans the insurance protection their families need

USAA hopes that PBR will result in a victory for consumers like our young military member, paving the way for insurance companies to make life insurance more available and affordable than ever. With more right sized reserve requirements in place, providers may be able to better compete and drive further innovation in the future. Making life insurance more easily consumable and attainable for customers will continue to be a goal for USAA and the life insurance industry.



1 Military Future Insurability — Increases in coverage require payment of additional premium. Availability of increased life insurance coverage depends on characterization of military separation. Form ICC1497953 03-14 and LBR97953ST 03-14 (may vary by state); NY Form NBR97955NY 03-14.
Life insurance and annuities provided by USAA Life Insurance Company, San Antonio, TX, and in New York by USAA Life Insurance Company of New York, Highland Falls, NY. All insurance products are subject to state availability, issue limitations, and contractual terms and conditions. Each company has sole financial responsibility for its own products.