The level cost of permanent critical illness insurance products has been spiralling upward during 2012. Actuaries blame interest rates.When Manulife Financial increased the price of its level cost of insurance (COI) universal life at the end of 2010, it triggered a real tidal wave in 2011. The scenario is playing out the same in critical illness. After Manulife increased the level cost of its critical illness insurance for the first time in 2011, its competitors followed suit this year and then Manulife raised prices a second time on June 16.

Like whole life and level cost universal life insurance, permanent critical illness products like T100 and T75 are vulnerable to low long-term interest rates.

As for Manulife, it has increased the price of several guaranteed products because of low long-term interest rates. Everything is affected: level COI universal life, whole life, T100 life insurance, as well as T100 and T75 critical illness insurance.

According to sources contacted by The Insurance and Investment Journal, most insurance companies increased the price of these products or will soon do so.

As for Canada Life and Great-West Life, they raised the price of these products at the beginning of the year. Since then, people aged 20 to 50 are paying on average 8% more for the T100 version of the LifeAdvance product (known as Oasis at Great-West). The average increase is 11.5% for T75 version payable to age 65, 9% for the T75 version, and 13.5% for the 15 year quick-pay permanent version.

In January, LS Mutual raised the price of its CI product, T100 Prodige, by nearly 25%. A mutual insurance company based in Saint-Hyacinthe, Quebec, this niche player had not revised this product’s pricing since it was launched 6 years ago.

Industrial Alliance raised the price of its permanent critical illness insurance products on July 3. The increase was limited to 2% for smokers while prices went up by 7% for non-smokers.

Louis-Charles Leclerc, director of individual insurance products at Industrial Alliance, explains why the increase was more severe for the nonsmokers. “We had room to manoeuvre with smokers because they have always paid a higher premium for critical illness,” he says. “We had priced them a little more cost-effectively than nonsmokers, being conservative, because changes in the morbidity rate for smokers is less well known,” comments Mr. Leclerc.

Desjardins Financial Security (DFS) also went ahead with an increase later in July. When contacted to find out if it would follow the pack, Sun Life Financial stated that it did not want to discuss its pricing strategies at the moment.

SSQ Financial Group does not intend to raise the price of these products at this time, says vice-president of business development Marc Trépanier. SSQ acquired AXA’s individual life insurance products at the beginning of the year. “SSQ does not intend to raise the price of these products now because they are well-positioned in the market in the short term”, explains Mr. Trépanier.

More vulnerable

But that does not mean SSQ is immunized against the current interest rate situation. Mr. Trépanier points out that SSQ intends to further develop its longer-term products in the future. “We will be subject to more vulnerability with respect to long-term interest rates in our upcoming policies”, he says.

Further increases cannot be ruled out since interest rates remain low. The U.S. Federal Reserve recently announced its intention to keep its rates down until the end of 2014. Insurers are concerned. “I have learned over the last couple years to never speculate about where the bottom is”, comments Steven Parker, assistant vice president at Manulife Financial

“It has become a game of cat and mouse,” says Nathalie Tremblay, head of living benefits products at DFS. “When one insurer makes a move, the others rush to find out how much,” observes Ms. Tremblay.

Distributors have also felt the shock wave. Senior vice-president of marketing at PPI Financial for all of Canada, Claude Ménard notes that the price increases have changed the rules of the game. Advisors are shopping for price less frequently. “A permanent contract or another, it’s become six of one and half dozen of the other,” he says. “All the insurers are lining themselves up with Manulife’s increases by more or less 5%. The price war that the insurers have been fighting for 25 years is finished.”

The current environment reminds Mr. Ménard of interest rates before the 1980s. The result is that insurers have paid dearly for the price war. This path has made them more vulnerable to interest rates, and overall things have been made worse by actuarial assessments that assumed high lapse rates which did not materialize. They did not have any room to manoeuvre. The future now belongs to the insurers who are best able distinguish themselves by other means than by price. However, Mr. Ménard points out that there have been few innovations in individual life insurance life over the last ten years.

Some products have even disappeared. PPI Advisory, for example, had to refocus its level cost universal life insurance business with Industrial Alliance after RBC Insurance withdrew its product in June. At the moment Industrial Alliance is the only insurer who has retained a universal life product that is adapted to PPI’s 10-8 investment loan strategy, says Mr. Ménard. This is one of PPI’s a preferred markets.

At Industrial Alliance, Mr. Leclerc notes that there has been no innovation in critical illness insurance and individual life for two years, and this is the case in the entire industry. “Instead of innovating, many insurers are caught up in re-evaluating their pricing. One hopes that the trend will soon reverse,” he says.
In addition to its level cost universal life insurance, in July RBC Insurance also suspended the sale of three versions of its Critical Illness Recovery Plan product, namely the policies offering level premiums to age 100, level premiums to age 75 and payable to 65, and return of premiums at surrender or maturity. It was a move that caught many advisors and insurers by surprise.

The industry is at a crossroads, observes Ms. Tremblay. “With a hardline approach like the one taken by RBC Insurance, one sees that interest rates are affecting the ways in which the insurers allocate their capital,” comments Ms. Tremblay.

On the other hand, it seems to her that to cease selling a product is a risky move – one that DFS dismisses out of hand. “Will advisors go out and sell RBC’s critical illness term product, or will they make a run for another supplier who still offers a permanent product?” asks Ms. Tremblay.

Mr. Parker of Manulife points out that extended premium guarantees require insurers to keep long-term liabilities on their books. “You try to cover your costs and you must invest your premiums at very low interest rates,” he comments.

The end result is that the insurer does not have the time to accumulate the money required to both fulfill its obligations and make a profit on this kind of business. Mr. Parker notes that T100 and level-to-age-75 critical illness insurance products are very sensitive to low long-term interest rates. “This our second round of increases on CI. We did a first round a year ago. Long term interest rates have declined by 0.75% since that time,” he comments.

“The longer the premium is guaranteed, the greater the impact [of low interest rates],” says Saundra Edwards, assistant vice president of individual product marketing for Great-West Life, Canada-Life and London Life. All insurers are affected by the situation to the same degree, she adds.

Mark Halpern, president and founder of MGA illnessPROTECTION.com, believes this is only the beginning. “The big thing is that the interest rates on these products were all priced in the early nineties. In reality, a long term government note is paying out around 2%. It’s very difficult for the companies to protect their risk, going so far into the future,” he says.

Sales will migrate

Mrs. Edwards believes, however, that the increases will not slow down the momentum that the critical illness product has in the Canadian market. Sales have been on the rise since 2007.

“Even with this recent rate increase, we believe that critical illness insurance continues to provide excellent value to consumers. The statistics show that one in two men and one in three women will suffer from heart disease, stroke or cancer in their lifetime. Having the funds at hand to help offset additional medical and lifestyle costs helps to ease the burden associated with developing a critical illness,” she comments.

Ms. Tremblay also believes that the pricing trend will have little impact on the sales of critical illness insurance with long-term premium guarantees. She believes that DFS has the wind in its sails. “Last year, we exceeded the average industry growth by more than six times. We were the largest issuer of individual critical illness insurance in 2011,” she notes.

In the first quarter of 2012, DFS saw 33% growth in critical illness insurance. “This is almost four times more than the industry average,” says Ms. Tremblay.

“When an insurer increases its premiums significantly, there is an impact on its business in the short term but not on those of its competitors. The advisor places his business elsewhere,” she adds.
Increase or not, life goes on and the client’s needs remain. A price hike may even go unnoticed. “An increase in the annual premium of $1,000 to $1,100 or $1,200 will surprise an advisor, but does his new client know that the policy only cost $1,000 last week?”

The advisor may also change how he allocates his critical illness sales with the same provider. “Advisors may transfer their business to the term product,” comments Mr. Parker. “It’s still early to tell for sales changes but advisors may switch to term, as clients are going to look at other types of CI products, like T10 and T20.”
Despite the significant increase in the price of its Prodige product earlier this year, LS Mutual is selling more of it, says Stéphane Rochon, the insurer’s vice president of sales and marketing. “With this increase, we abandoned the adult market a little because we wanted to remain competitive in the children’s market,” he explains. “Despite everything, sales are growing. The increase in the price of the children’s product appears less significant because it is a question of smaller premium amounts.”

He also points out that there has been some migration towards term products. “The increase has not affected us in the children’s market, but in adults, we have seen advisors moving towards T10 and T20,” comments Mr. Rochon.

At Industrial Alliance, Mr. Leclerc has also noticed this tendency within the insurer’s captive network. “The career network is more focused on the family market. The purchase of insurance is therefore a question of budget. The advisor will sell less expensive term coverage with a conversion option. We have seen this in our critical illness sales.”

Mr. Leclerc believes it is still too early to determine the effect of the increases on the MGA channel. He says that Industrial Alliance’s total sales of individual critical illness insurance in the first quarter of 2012 came to $3.64 million dollars. “From this number, 31% came from the sales in the career network, namely $1.14 million, with 69% of the sales coming from the broker channel, or $2.5 million.”

Lucrative business

Mr. Halpern of illnessPROTECTION.com believes that insurance advisors will be able to avoid the impact of these premium increases on their sales. Advisors who sell the product based on needs rather than by the premium will benefit from change, he says.

However, Mr. Halpern is concerned by the fact that so few advisors sell critical illness products. “They’re missing out on a very lucrative side of the business or really not taking their responsibility to clients seriously,” he comments.

Mr. Rochon of LS Mutual also believes this is the case. “Advisors should be made aware of the incredible share of the market that they are neglecting,” he says. “Out of a hundred advisors, I do not even have fifteen who sell one critical illness product in a year.”

To take advantage of this potential, Mr. Halpern believes that advisors need to improve their skills and education. He points to his own credentials, namely the Certified Financial Planner (CFP) designation from the Financial Planning Standards Council and the Trust and Estate Practitioner (TEP) from the Society of Trust and Estate Practitioners. Like the CFP, the TEP is an designation held by a range of professionals, from lawyers to financial advisors.

In Mr. Halpern’s opinion, it is a way for advisors to demonstrate their commitment to complete financial planning. For he believes that it is only after having created a complete plan that an advisor can responsibly introduce a critical illness product as part of a client’s financial strategy.

“If you are engaging your clients in a problem solving approach rather than in a product sale, then there’s a place for CI regardless of the price, and it’s not a question of whether the rates are going up or not,” he says.

What’s more, Mr. Halpern believes that there has never been a better time to buy because there is no better critical illness insurance product in the world than the Canadian product with its guaranteed premiums. In fact, he is concerned that there may be a levelling down in the future. This kind of thing has already occurred in the markets where CI was first introduced, in particular South Africa, Australia, and the United Kingdom.