It seems that these days all you hear about is how that cost of this, or the cost of that will be going up soon. Very rarely if ever do you read or hear about the cost of anything actually going down. Well now there may be an exception with the cost of life insurance which some experts saying will be coming down. So why is this happening? Nobody wants to “look a gift horse in the mouth” be it is still interesting to know.
Insurers use a system to calculate and make sure they have enough money to determine whether they have enough money in reserve to pay out their claims. Well now there is a new system coming into play. Known as principle-based reserving, the framework has been adopted by 46 states and was rolled out across the nation on Jan. 1, 2017. Insurance companies have three years to transition to the new system that uses simulation models to estimate the necessary reserves to cover future claims.
The use of principle-based reserves represents a major shift for the industry, and one that reflects the how life insurance policies like many things are changing. As the principle-based reserves system is used more, some experts in the industry expect life insurance premiums to drop as companies adjust to the new reserve requirements.
These changes were prompted by significant changes in the market. Companies now offer a variety of term, whole and universal policies, and as a result, the old rigid system of calculating reserves no longer worked. In some cases, companies had accumulated large reserves which were in excess of what was needed. The traditional formula was more rigid and didn’t allow for variations, companies were unable to adjust the size of their reserves on their own.
There are still those who are less optimistic about premiums going down but overall most are still expecting the savings to come true.