#263 | 7702 Update – Symetra Moves First

Nearly 2 months after the fact, we finally have our first retail product illustrations that reflect the new 7702-2% (as opposed to the old, 7702-4%) rates. The results are in-line with what I wrote about in previous articles, but I think it’s still worth going through a few of the key points from those articles and how things actually look with Symetra’s Accumulator IUL 3.0.

Premium Limit Changes

Below is a table of the pertinent changes to the 7 Pay maximum non-MEC premium and Guideline Level Premium under Option 2, the two limiting factors for premium contributions for accumulation sales:

Male, 45, Preferred, $1M7 PayGLP – Option 2Difference
7702 – 4%$39,538$38,8801.6%
7702 – 2%$72,767$62,59414%

These numbers are spot-on to what I’ve calculated and used in recent articles and presentations using a third party spreadsheet (although the first article used a different spreadsheet and produced slightly different numbers). The most interesting piece is the new and dramatic difference between the GLP Option 2 premiums and the 7 Pay maximum non-MEC premiums. Under 7702-4%, the difference was trivial, meaning that using GPT to take advantage of its lower corridor factors didn’t require a materially different death benefit than CVAT using true 7 Pay premiums. However, that’s no longer the case. Under 7702-2%, a CVAT policy could have a 14% lower death benefit than a GPT policy for the same premium, at least for this cell. This is confirmation that CVAT has an inherent accumulation advantage over GPT under 7702-2%, at least in terms of premium funding levels per dollar of death benefit.

Compensation Changes

Based on the fact that 7702-2% allows for more premium per dollar of death benefit and Target premiums are linked to death benefit, it’s an inevitability that maximally funded 7702-2% products pay less compensation per dollar of premium than 7702-4% products. This is true for Symetra’s product because Symetra did not recalibrate its Targets to take into account the new limits. In effect, this will result in a significant compensation decrease for producers in maximally funded cases where the client defines a premium rather than a death benefit. For the 45 year old Male that I used for my articles and for this case study, this results in a compensation reduction of between 36% (GLPO2/GPT) and 45% (7 Pay/CVAT)

GPT Performance

As I wrote in previous articles, my analysis pointed to the fact that the performance gain from the higher 7702-2% limits would be marginal – somewhere in the neighborhood of 33 basis points or less, over the long run, assuming that compensation fell along with the death benefit as it does in the Symetra product. It turns out that my analysis was potentially too conservative. The problem is that the post-reduction death benefit is higher under the new 7702-2% GPT than I thought it would be, which means that the policy has to carry more death benefit after the reduction than under the old 7702-4% GPT limits. That eats away at the performance advantage of the new, higher funding levels. Take a look at the difference over time:

Policy Year7702-4%7702-2%Difference
101.54%2.49%0.95%
153.16%3.72%0.56%
203.85%4.24%0.39%
254.22%4.53%0.31%
304.46%4.71%0.25%
354.62%4.84%0.22%
404.73%4.92%0.19%
454.80%4.96%0.16%
504.84%4.99%0.15%
554.90%5.03%0.13%
604.93%5.05%0.12%
654.94%5.06%0.12%
704.95%5.06%0.11%
754.96%5.05%0.09%

That ain’t much. In terms of income, the difference between GPT 7702-4% and GPT 7702-2% is a mere 4%, at least for this cell. In the succinct words of a friend of mine, it looks like Symetra traded 40% of the agent’s compensation to give a 4% increase in income – and that seems like a pretty bad trade, all things considered, for the competitive position of the product.

CVAT vs. GPT Performance

I made a point in the previous articles about the fact that I thought CVAT designs could be nearly as compelling as GPT designs under 7702-2%, which could mean a major shift in the market away from complex GPT designs and towards simpler CVAT structures, basically rendering GPT obsolete. Again, it appears that I was too conservative. Take a look at the comparison between a CVAT design funded at the maximum non-MEC premium limit and a GPT design funded at the GLP Option 2 level premium (the maximum level premium allowable under GPT):

Policy YearGPT 7702-2%CVAT 7702-2%Difference
102.49%2.78%0.29%
153.72%3.89%0.17%
204.24%4.35%0.11%
254.53%4.58%0.05%
304.71%4.71%0.00%
354.84%4.79%-0.05%
404.92%4.83%-0.09%
454.96%4.83%-0.13%
504.99%4.81%-0.18%
555.03%4.80%-0.23%
605.05%4.88%-0.17%
655.06%4.94%-0.12%
705.06%4.99%-0.07%
755.05%5.03%-0.02%

CVAT holds the edge in the early years for two reasons. First, it requires a lower initial death benefit for the same premium contribution than GPT. Second, the lower initial death benefit means slightly lower compensation. However, the lower corridor factor in GPT eventually lets the GPT design catch up to CVAT after 35 years, in this example, but ultimately the two designs offer nearly identical performance with CVAT carrying more death benefit along the way. This is an astounding conclusion. Why would anyone use GPT over CVAT? I’m at a loss. And to make things even more interesting, the income between these two designs is essentially identical. If other products under 7702-2% produce similar results and companies start to port Overloan Protection Riders over to CVAT, as is already being discussed (and priced) at some insurers, that will mean the end of GPT as the design favored for accumulation and the rise of CVAT.

Conclusion

Again, the Symetra results line up nearly perfectly with my results calculated using the Dynamic Illustration Tool (DIT, my own illustration software) and third party 7702 calculators. However, the difference between 7702-4% and 7702-2% under GPT was closer than I thought it would be. The benefits of reduced compensation was offset by a higher death benefit after the face amount reduction. This raises a rather interesting question – if Symetra had increased compensation to get it back to where it used to be on a per dollar of premium basis, would have happened to performance? It’s possible that performance actually would have been worse under the new 7702-2% limits than under the old 7702-4% limits, as crazy as that sounds. That may also be why Symetra went on ahead and released the product as-is without making compensation modifications, betting that other companies would come to the same conclusions after running their own analysis. In fact, we can get a bit of a feel for what the pricing would have looked like because Symetra Accumulator IUL 3.0 has a blending functionality, so it’s possible to run the illustration at the old 7702-4% limits but blend the compensation so that it matches the new 7702-2% illustration. When you do that, the illustrated advantage of the 7702-2% limits drops to less than 0.02%. The illustrated income differential drops to less than 1%. In other words, what this Symetra product appears to show is that the 7702 limit change itself, excluding the effects of compensation, had essentially no impact on policy performance, which confirms what I saw in my initial analysis and what other folks have seen in their analysis as well.

From what I’ve heard, Lincoln is next on the docket to release illustration capability for 7702-2% rates. Stay tuned. It’s going to be very interesting to see if any life insurer figures out how to get more blood from the stone.