Are long-term guaranteed life insurance products at stake in the Canadian market? This was a central point of discussion during the CEO panel session at The Insurance and Investment Convention held in Montreal in November.
The presidents of three companies – Les Herr of Empire Life, Rene Hamel of SSQ Financial Group and Steven Ross of La Capitale Civil Service Insurer, La Capitale Insurance and Financial Services and Penncorp Life Insurance, agreed that these products are under tremendous pressure due to a perfect storm of market conditions that have combined to force insurers across the industry to reprice, review or withdraw long-term offerings in recent months.
The challenging market conditions include the prolonged low interest rate environment, more demanding regulatory capital requirements and new international accounting rules.
To continue to provide Canadians with long-term products, insurers may introduce adjustable pricing, Mr. Herr – who is also chair of the Canadian Life and Health Insurance Association (CLHIA) – suggested to a packed room of financial advisors. The pricing of adjustable products would be linked to the interest rate environment. When interest rates are low, product pricing would be higher. When interest rates rise, pricing would go down.
“I think we all have to get used to the fact that the majority of those long-term insurance contracts may in fact have to be more of an adjustable product than they are today.”
He asked the audience members how many of them would sell adjustable solutions today? When very few hands were raised, Mr. Herr said that advisors may have been left with a bad taste in their mouths from their experience of selling adjustable products in the past. “Adjustable, historically, has not been a fun product right? Because it was sold in the early days when interest rates were very, very high, the price the consumer paid was very, very low. Then, of course, as interest rates have fallen over the last 10 to 15 years, those adjustables have adjusted and it’s been painful,” he said.
Now, however, the timing may be right to introduce a new generation of adjustable products, Mr. Herr explained. With interest rates so low, product pricing for long-term guaranteed products is quite high. This means that consumers who buy products now are “going to be stuck at a high price unless they rewrite.” Rewriting down the road when you’re a baby boomer or older is not always a simple solution or might not even be possible due to health reasons, he underlined. Selling insurance with an adjustable feature would enable consumers to benefit from a price break when interest rates move back to an historical average.
From an insurer’s perspective, adjustable products would require less capital reserves, so the pricing could be somewhat better, he adds.
With regard to the risk associated with long-term guaranteed products, Mr. Hamel of SSQ asked rhetorically, “Who will accept interest rate risk over 100 years?” No insurers want to do this, he stated. This is why insurers are now proposing adjustable products as one avenue. However, for these products to gain acceptance, Mr. Hamel says they must have two qualities: “Simplicity and objectiveness. Make sure that you find these qualities in the products that are offered to you in the coming months and years,” he told advisors. Jacques Desbiens, president and CEO of UL Mutual was present in the audience at the panel session. Since his company recently launched an adjustable product, he was asked by the panel moderator to contribute to the discussion. He said that he has heard that other insurers are also thinking of introducing adjustable solutions to the market, which he would welcome since more players would help build a market for such products.
“The more insurers that offer these products, the easier it will be.”
Mr. Herr says he doesn’t see the introduction of adjustable pricing as a bad thing. In fact, whole life products already contain an adjustable component, he notes. “It’s not adjustable in terms of premiums, but it’s adjustable in terms of cash values…They are not guaranteed.”
At the same time, he says he understands the historical context that may make advisors concerned about adjustable pricing. To counter this, the industry will have to come up with solutions that advisors and their clients can count on. “That’s the number one concern for insurance companies. Yes, we have to make a profit. But if we ruin our reputation because we can’t put out solutions that can stand the test of time, then that is a bigger problem.”
Mr. Hamel added that he believes long-term life insurance products are here to stay in Canada, but will change. However, he told advisors that if they wish to stand out in the market, products are not the key consideration. “I think the future can be summed up in three words: service, service, service. Innovation will be found much more on the service side than on the product side. Products will evolve but the end of the day, that will not be what makes you stand out in the market.”
Sales on the increase
Mr. Ross of La Capitale explained that industry statistics show that insurance sales are on the upswing. He says there is a great deal of uncertainty in the current market environment but he encouraged the advisors in the audience to take advantage of the products and pricing that are available now.
When the market conditions improve for insurers, he believes they will find a way to offer clients price reductions if products are overpriced. Otherwise, they may risk losing market share to competitors.
For the coming months, however, Mr. Ross predicts that the trend of increasing prices will continue.
He added that his experience in the industry has taught him that there will always be players who will find a way to manage risk differently that will go after market share. “Will all players go in the direction of adjustable products? Will this market (long-term products) disappear? I don’t know…I doubt it. It is here to stay.