Low long-term interest rates and financial market volatility has put an end to Empire Life’s 5% lifetime withdrawal amount at age 65 in its Class Plus product – this was the last insurer offering this level of guaranteed income in the market. Following this move, Manulife Financial reduced the income bonus in its IncomePlus product to 3.5%.
These are just two recent examples of the many product changes seen in the market as 2012 came to a close. Is the pace of change likely to continue at the same speed in 2013? Nothing indicates otherwise.
The latest monetary easing by the US Federal Reserve should maintain interest rates at floor level for at least two years. At the same time, stock market volatility should continue, as the European sovereign crisis and a slowdown in China weigh on the global economy.
Insurers are trying to mitigate the impact of these persistent factors on the profitability of their guaranteed products. As a result, they have raised the prices of permanent insurance products and reduced or eliminated guarantees. After a month filled with product changes in November, the trend continued throughout December.
closes Class Plus
At the very end of the year, Empire Life announced the end of its guaranteed lifetime withdrawal benefit (GLWB) at age 65 product. The insurer closed its Class Plus product to new sales as of Dec. 31 and is replacing it with Class Plus 2. The insurer was the only player still offering it, and now says that it can no longer support the product’s “success.” In a message to advisors, the insurer pointed out that persistently low interest rates, continued market volatility, and increased capital reserve requirements have been challenging for insurers.
The new scale of withdrawals set out in Class Plus 2 allows for a 3% lifetime withdrawal amount for the 55-59 age group, 3.5% for those aged 60-64, 4% for the 65-69 age group, 4.25% for those aged 70 to 74, and 5% for those aged 75 and older. Deposits to the terminated product will be limited to $25,000 per policy in 2013. As for the annual management fees, they will increase by 0.25% effective Jan. 2, 2014. While competitors have been increasing prices, Empire pointed out that it had not increased the cost of its guaranteed withdrawal benefit products since 2008.
Manulife Financial relaunches GWB
Manulife contributed to the weakening guaranteed withdrawal benefit (GWB) market at the same time. Competition and economic circumstances led the insurer to announce the launch of version 2.2 of its IncomePlus product on Jan. 14. In this new version, the income bonus has been lowered from 5% to 3.5%. The GWB bonus is available for each year in which the policyholder makes no withdrawals.
The insurer is also overhauling its InnoVision, Security UL and Limited Pay UL products, for which the level cost of insurance will increase by an average of 12% to 14%. Younger people will face the largest increases. The increase in rates for InnoVision will also lead to price increases for term life coverage in the Family Term and Business Term (T100) products.
The insurer took the opportunity to announce that it will also be raising its prices and reducing commissions effective Jan. 26. The company explained that interest rates had had a significant impact on the cost of insurance guarantees, and said that market conditions and forecasts suggest that interest rates will remain low in the near future.
A complex reduction in first year commissions varies according to product and the age of the insured, and depending on whether it is a question of deposit commissions or draw commissions. In Innovision, for example, the first year deposit commission is dropping from 5% to 4%. Draw commissions are decreasing from 55% to 46% for issue ages under 60, while they will drop to 51% for issue ages 60 and over. Draw commissions for Security UL will be dropping from 57% to 47% for issue ages under 60, and to 52% for issue ages 60 and over while draw commissions for Limited Pay UL will decrease by 5% for all durations.
Desjardins changes its permanent policy
One of the last to make changes in 2012, Desjardins Financial Security (DFS) hiked the price of its permanent insurance products on Dec. 13. Lower interest rates “for several years” had a marked effect on the profitability of limited pay products, DFS explains – a story often heard in 2012.
DFS announced an average increase of 3% (2% for insurance amounts of $250,000 or more). Two products are targeted: non-participating limited pay whole life Life 10, and the whole life type cost option payable in 10 years on its universal life platform PACE.
A few weeks earlier, the insurer moved up the deadline for accepting additional deposits to existing Helios Version 2 GWB policies. In December 2011, DFS blocked additional deposits to Helios Version 1.
In August, Sun Life Financial reduced the risk of its SunWise Essential Series 2 segregated funds by eliminating some fund choices. Earlier in the year, it withdrew the Income category of this product, its GWB, from sales in the managing general agency network.
Then on Dec. 3 the insurer launched SunFlex Retirement Income, a vehicle that holds registered funds exclusively. It is a type of hybrid between a lifetime and variable annuity. In addition to the guaranteed minimum income payment, the product offers annuitants ages 55 and over “bonus income set every year…to benefit from market growth,” depending on the fund selected. Investors can now choose to receive a lump sum based on the future payments they would have received.
Standard Life replaces seg funds
In mid-December Standard Life announced that it was replacing its Ideal Segregated Funds - Signature Series with Ideal Segregated Funds Signature 2.0. The seg funds include a new series with 75% maturity and death benefits, as well as a new management fee scale that unbundles insurance charges.
“The 75/75 Series targets investors who want to diversify their portfolio with a tactical income fund that has a ‘go anywhere’ mandate designed to protect capital in down markets and capture returns in up markets,” says Michel Fortin, senior vice-president of marketing and customer solutions at Standard Life. He adds that the new fee schedule clearly identifies management fees and insurance fees “so investors will better understand what they are paying for and how their investments are performing”.
With this new version, Standard Life hopes to capitalize on the popularity of its segregated funds. The company says that it “captured 9% of all industry sales growth in the first nine months of 2012, despite the suspension of new sales of its guaranteed lifetime withdrawal benefit product in April 2012.”
On Nov. 30, Equitable Life raised the price of its level cost product. The Universal life product. Equation Generation IV saw an average increase of 7% compared with 9% for EquiLife limited pay.
The insurer’s T100 and T75 critical illness insurance product were also repriced. T100 increases by 13% on average with no return of premium option, and by 14% with this option. T75 costs 6% more without the return of premium option and 15% with it.
On Nov. 26, Canada Life (including Great-West and London Life) raised the price of its critical illness while removing two premium reduction options from its critical illness and disability products. The increases were largest for young people and women, and for policies with return of premium on surrender or expiry. They vary from 5% to 30% depending on the product and the presence of a premium return option.
Canada Life, together with Great-West and London Life, had recently reduced their GWB. For example, the guarantee for ages 65 to 69 slipped from 5% to 4.2%. The insurer also trimmed the product’s accumulation bonus from 5% to 3%. Contracts in force remained unchanged.
On Nov. 24, Empire Life axed the product Solution 20 and raised the price of Solution 100 by 21% on average. Both products are non-participating whole life. The increase ranges from 9% for the oldest insured to 45% for the youngest. At the same time, the insurer increased the product’s cash value.
Level cost universal life was not spared, the average increase in level cost for Trilogy and Trilogy Plus was 20%. The increase varies from 9% for the oldest insured to 33% for the youngest.
Also in November, Transamerica Life Canada terminated several of its segregated funds, including six in its Guaranteed Investment Funds (GIF) line, transferring the assets to new or existing funds.
Earlier in 2012, Swiss Re released a study on the impact of low interest rates. The reinsurer urges life insurers to protect their long-term profitability by designing less risky products. “Consequently, life insurers must re-price their guarantees and also adjust their product offerings to mitigate their exposure to interest rate risk,” Swiss Re wrote. “Difficult-to-hedge guarantees that create little value for customers at the point of sale must be eliminated,” the study adds.
Canadian insurers heeded the message. SSQ Life added new risk-lowering segregated fund guarantees on Nov. 26. The insurer also introduced the ASTRA Basic Guarantee 75% - 75%. For this product, the guarantee cost is included in the management expense ratio. No reset is offered. To harmonize with the new arrival, SSQ renamed its existing guarantees. ASTRA Standard Guarantee 75% - 100% becomes ASTRA Enhanced Guarantee 75% - 100%, and ASTRA Premium Guarantee 100% - 100%+ becomes ASTRA Optimal Guarantee 100%.
SSQ has now set a limit date of age 85 for resets at maturity for these two guarantees. The expiry date for reset at expiry is now 15 years later, up from 10 years. The 100% - 100% product offers reset until age 80 for guarantee at death, which is not offered by the product 75% - 100%. The 100% - 100% product has a guaranteed cost bracket of 0.05% to 1.75%, versus 0.26% to 1.60% previously. Nonexistent in the past, guarantee costs for 75% - 100% can range up to 1.00%.
Finally, PPI Financial Group launched two new life insurance products in tandem with insurers. Insured by BMO life insurance, Signature is a universal whole life product. It is designed to weather low interest rates and capital requirements by offering three insured capital reduction options at a given age. LifePhases, insured by Assumption Life, is available as term or permanent insurance.