A Market Opportunity for Committed U.S. Insurers

OLDWICK, N.J.--(BUSINESS WIRE)--April 18, 2005--The preneed segment continues to evolve, influenced by many of the same economic and environmental factors affecting the broader life and health insurance industry, according to a recently released special report, by the A.M. Best Co.





Low interest rates, intense competition, demographics and increasing regulatory oversight are all issues that have helped shape the landscape in the preneed segment. The report is based on responses to A.M. Best Co.'s most recently completed industry Annual Life/Health Supplemental Rating Questionnaires.



Preneed policies are generally life insurance policies. Annuity policies also are used in this market, although to a lesser extent. Generally, if a client is "at need" where death is imminent within the next few months, then preneed life insurance is not really appropriate. Instead, that individual likely would purchase a single-pay annuity and designate the funeral home as the beneficiary.



Based on the survey of companies rated by A.M. Best, more than $1.75 billion of funeral value was issued by the preneed industry during 2003. About 16% of this business was issued as individual, single-pay life insurance and 9% individual, multipay life insurance. Group life insurance issued was the most popular type of product, with 41% single pay and 25% multipay, for a combined 66% of the total business. Annuity sales are quite significant for some preneed companies, but for the total market only represent about 9%, divided between single pay (5%) and multipay (4%).



The persistency of this business is very good, with almost a 100% retention for preneed life insurance policies written on a single-premium basis, and higher lapses for modal-pay business. Sales through third-party marketers generally have lower persistency. Mortality is a key concern and must be priced appropriately, as the mortality rate is significantly higher than for any other life insurance product. The average age for new preneed contracts is approximately 71 years old, with in-force at approximately 72.



A.M. Best anticipates that the preneed segment will continue to be highly competitive, with the most successful companies committed to a long-term value proposition. While demographics continue to be favorable, A.M. Best believes near-term challenges will make the market difficult, with earnings pressures continuing due to spread compression and limited pricing discipline in certain segments. Based on survey input and in line with the general trend in the industry, A.M. Best expects that the net number of players in the market will either be stable or likely will be reduced from current levels over the next five years.



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