Washingtonians may be paying slightly less for life insurance premiums in the futures as the result of emergency legislation passed recently by the D.C. City Council.
The measure allows companies to decrease their reserves by about 10 percent, so it is expected some of the savings will be passed on to consumers. It is not retroactive.
Predictions are the new law will boost sales of annuities, which have become popular for IRA and Keogh retirement plans. Reserves for annuities can be decreased by about 25 percent, making greater reductions possibel in this product than in ordinary whole life insurance. The exact amount of premium reduction will be up to competing insurers. Premiums, unlike reserves, are not regulated by the state.
The amount of money a company must set aside to guarantee claims was decreased by the District Insurance Department because rates of return on investment have increased in recent years.
By raising the assumed rate of interest a company will realize on its investments from the current 3.5 percent to anywhere from 4.5 percent on whole life insurance contracts to 7.5 percent on single payment annuities, Superintendant Maximilian Wallach brought the District into line with the rest of the country. The emergency legislation was requested by the industry which wanted to avoid having to make different assumptions for jurisdiction.
Another provision of the law may prove more controversial. It allows insurance companies to use a six-year difference in life expectancy between men and women, with the result that women will be offered lower-priced insurance products that have lower reserves and lower non-forfeiture values. (Non-forfeiture refers to the minimum value a policyholder can receive if he or she cancels the policy.)
The Supreme Court ruled last spring that women cannot be made to contribute more to pension plans because they live longer. Wallach said he expects the insurance law will also be challenged in court. The new law will also require firms to establish "reasonable" values for non-forfeiture in annuities.
A second change in D.C. insurance laws was precipitated by the near bankruptcy of Government Employees Insurance Co. Two years ago Geico, the country's fifth largest auto insurer, faced insolvency. The company's competitors were reluctant to take over $265 million in premiums in a reinsurance agreement because, as Travelers Insurance Co. said, they feared the proposal would inhibit their capacity to meet insurance obligations elsewhere.
Part of the difficulty stemmed from the law covering distribution of assets in case of insolvency. It required the firms participating in a guaranty fund to put up enough money to cover all the policyholder clamis made against the bankrupt insurance firm. By the time liquidation had been completed, a process often requiring five years, the joint underwriters might get some of the money back, but meanwhile they had to raise their rates to their own customer.
The Geico insolvency was avoided but it prompted Wallach to urge the City Council to pass legislation favoring a graduated approach.
Under the new direct access law, the guaranty fund board will make small assessments in order to start paying the claims that have been approved. At the same time the liquidator will begin to turn the bankrupt company's assets into cash.