One aspect of the life insurance landscape that might not always be in the spotlight but affects both advisors and clients is insurance carrier reserving requirements. In this article, we’ll delve into reserving requirements, what they are, how they vary from state to state, and why they should be on your radar when advising clients.
What are reserving requirements?
Reserving requirements are the regulations and guidelines that govern the amount of funds that life insurance companies are legally required to set aside to cover their future insurance obligations and claims liabilities. These requirements ensure insurance carriers have the financial stability to fulfill their promises to policyholders.
Here are some examples of reserving requirements:
- Statutory reserves: This is the minimum amount a carrier must have on hand to meet claim liabilities.
- Mortality and morbidity reserves: These reserves cover the cost of insurance for the death benefit, excluding administrative fees.
- Interest rate reserves: Fluctuations in interest rates can impact the value of bonds. A carrier with a substantial bond portfolio may need to adjust rates to maintain financial stability.
- Unearned premium reserves: Commonly seen in whole life policies, these reserves account for the possibility of paying back premiums to the policyholders if the policy performs well.
- Policyholder dividend reserves: These reserves are similar to unearned premium reserves and are set aside to pay surplus earnings to policyholders.
- Asset valuation reserve (AVR): This reserve ensures that capital is available for unexpected debts or financial losses.
- Risk-based capital (RBC) requirements: Carriers set aside reserves to cover various risks, such as asset, credit, or underwriting risks. There is a specific ratio they must maintain to cover these liabilities. State insurance regulators typically set these ratios.
State-specific reserving requirements
It’s crucial to note that reserving requirements are not universal; they vary from state to state. Each state has its own set of regulations and guidelines; sometimes, individual insurance products within a state can also have different requirements.
Why do reserving requirements matter to advisors?
While advisors are not responsible for ensuring carriers comply with these regulations, they indirectly impact their business and, more importantly, the clients. Here's how:
- Product availability and pricing: Reserving requirements influences the cost of premiums. If a carrier has an excessively high reserve, it could push premium costs higher. On the flip side, if a carrier does not reserve enough, it might offer lower premiums, which could impact its financial health and potentially affect its claims-paying abilities.
- Minimum interest rates: Some permanent insurance policies offer guaranteed minimum interest rates on the cash value growth in the policy. These minimum rates are often influenced by reserving requirements. If the reserving requirements set by regulatory authorities are high, it may constrain the carrier's ability to offer higher guaranteed interest rates. Conversely, lower reserving requirements may allow carriers to give policyholders more attractive minimum interest rates.
- Transparency: Insurance carriers must provide information about their financial condition, including their reserves. Being under-reserved can impact a carrier's financial stability, which, in turn, may affect the trust and confidence your clients have in that carrier. As an advisor, you may discourage clients from choosing a carrier with low reserving requirements.
How reserving requirements impact your clients
Understanding that your clients are at the center of this issue is essential. Reserving requirements influence the availability, pricing, and guarantees of insurance products. By knowing how these requirements affect your clients, you can better guide them in making informed decisions that align with their financial goals and risk tolerance.
How Modern Life can help
Modern Life, as a tech-enabled brokerage, can be an invaluable partner for insurance advisors and their clients. Here's how:
- Streamlined client intake: Modern Life offers digital intake forms, enabling clients to conveniently complete necessary documentation from the comfort of their homes. This leads to more precise responses and accelerates the underwriting process, ensuring your clients promptly get the coverage they need.
- Efficient document management: We provide a secure platform for storing and organizing client documents. This single-point document management system minimizes paperwork-related mishaps, enhances organization, and promotes efficient case management.
- Responsive tracking: Advisors can effortlessly track the status of pending and completed requirements for each case. This real-time tracking system keeps you up-to-date and enables you to proactively engage with clients, helping to expedite the underwriting and approval process.
- Diverse coverage options: Modern Life offers diverse coverage options, allowing advisors to cater to various client needs. Advisors can also compare quotes from multiple carriers to find the best options that align with client preferences.
- White glove, responsive service: Insurance can involve complex scenarios. Modern Life provides dedicated support for complex cases, ensuring advisors receive the assistance they need. This support results in faster approval times and cost savings for your clients. Our brokerage team is equipped to handle challenging scenarios, respond promptly to advisor questions, and provide service that aligns with the evolving insurance landscape.
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