Most life insurance products are long term, and policy benefits and policyowner costs are not fixed at issue but depend on postissue company actions. Such actions include changes in the dividend scale (for participating business) and changes in interest crediting rates, mortality charges, or expense charges on accumulation and variable-type products.

As the insurance market has become more and more competitive, many policyowners, agents, and advisers have evidenced an increased interest in measures of insurance companies� financial position and performance. Companies� interest in comparing their performance to their peer companies� performance in several key areas has also increased. In addition to the analyses made by individual companies, several organizations have begun to measure and promulgate such comparative information. For the most part, these comparisons are based on information drawn from the statutory blue blank financial statements, which are available for all companies�mutual and stock�and contain more information related to pricing decisions than do the GAAP or hybrid financial reports. However, these published analyses can rarely, if ever, be used to demonstrate or measure real differences between companies or to highlight a company�s standings among its peers. At best, they can be used as general directional pointers.

The published comparisons tend to focus on a company�s financial strength, earnings growth, and sales and growth of the insurance lines.

With respect to financial strength, many measures have been developed and published over the years to compare the relative financial strength of the leading life insurance companies. These have, typically, been ratios of capital (usually defined as surplus plus the asset valuation reserve) to one or more measure of risk (assets, reserves, and so forth). As companies diversified their investment portfolios by type and quality and their liabilities became equally diverse, these broad general ratios have become virtually meaningless. This diversity must be brought into any competitive calculations, but even then the results must be used with great caution because the relative risk measures assigned to different types of assets and liabilities are themselves often arbitrary. The RBC standard, which is probably the most sophisticated approach to such a standard, is used by the regulators only to highlight companies for further investigation and, if necessary, action. The rating agencies never base ratings solely on current measures of financial strength (unless the company is bordering on insolvency) but look at the combination of current financial strength and current and future earnings power.

With respect to earnings growth, the standards used most frequently are the various earnings-per-share measures included in the GAAP financial statements. Statutory measures of income are less valuable because of SAP�s emphasis on conservative measurement of assets and liabilities and the prevalence of certain types of reinsurance transactions.

Regarding sales and growth in business, the statutory statement contains information that can provide bases for reasonably good comparisons among companies. A better service is the Life Insurance Management and Research Agency (LIMRA), which surveys a large group of companies to obtain consistent measures of new business for different types of coverage.

Information on companies� performance in the key areas (investment return, mortality and morbidity, expenses, and persistency) that affect prices and nonguaranteed benefits is of great interest to competitors, customers, agents, and advisers. Many firms develop and publish various types of comparative measures to provide insights to these interested parties. Most are of limited value.

The reason these comparisons are limited in value is that modern pricing techniques recognize the particular characteristics of the markets the companies serve and the unique costs of providing coverage in those markets. Often there are trade-offs among different cost factors. For example, much business insurance is written on a guaranteed-issue basis, with the additional mortality cost covered by reduced commissions and underwriting cost savings. Most analyses of a company�s experience and intercompany comparisons drawn from data in financial reports, on the other hand, must necessarily aggregate results for all markets the company addresses and, in some cases, for all lines of business. If a company that has a sizable amount of the business insurance described above is compared on an aggregate basis with a company that sells all of its insurance with full underwriting and full commissions, the former will show higher average mortality and lower average expenses. Although this statement is true, it has no significance because the customer purchases a product designed for a particular market, and the information required to compare the past and anticipated experience of the two companies in that market is almost never available from the companies� financial statements.

Theoretically, therefore, much information can be determined from a company�s financial reports, but as described above, the information is usually too aggregated to be relevant to the company�s pricing decisions in the market(s) of interest to the agent or policyowner. For example, in the case of investment income, companies usually have several portfolios of investments, each backing one or more classes of business. In addition, if the company prices on a "new money" basis, the overall portfolio rate does not reflect the rates for different classes of business. It is impossible to determine from the financial statements what investment return a company is earning on the assets associated with a particular class of business or how this performance compares with the comparable business of other companies.

The problem is even more complex in the case of mortality experience. Mortality expectations vary by age, sex, type of underwriting (for example, medical, paramedical, nonmedical, or guaranteed issue), and number of years since issue. Although the blue blank statements do show the net mortality costs (death claims incurred less reserves held) for the financial period, the information is of little value without an understanding of the company�s expected mortality costs (based on the distribution of business by risk class) and its pricing objectives, which are simply not available from the published financial statements. There is a similar problem with respect to morbidity under health insurance policies, although the smaller level of policy accumulations and the absence of cash values mean that there is a closer connection between the premiums charged and the expected morbidity.

With respect to expenses, the statutory blue blank discloses the amounts of a company�s commissions, general insurance expenses, and taxes for each principal line of business. There are also exhibits that present additional details on the components of these three expense categories but without a full breakdown by line of business. It is possible therefore to determine many ratios of expenses to various measures for a life insurance company�s book of business. While these expense ratios can give a general indication of a company�s expense situation, they cannot mark the company�s exact standing with any degree of precision. The problem is the same as that described for mortality. Expenses vary significantly by policy year (acquisition costs are vastly higher than renewal administration costs), size of policy, type of coverage (variable universal contracts involve more service and administrative costs than term insurance, for example), type of customer (individual versus business), and market served. The pricing used by the company ordinarily reflects these differences. Unless two life insurance companies have remarkably similar portfolios of business, it is impossible to determine from any general expense ratios gathered from information in their financial statements whether a company is meeting its pricing expense objectives or whether there is a significant difference in the expense levels of two companies that would affect future pricing actions.

Since there is no way of knowing how any two companies match up in terms of their business profiles and expense objectives, the published expense ratios developed from financial statements must be used with extreme caution. Even intercompany expense studies within the industry are often difficult to understand and interpret because of different organizational approaches and accounting classifications.