The vanguard has already increased the price of their critical illness products. Others will soon follow. As was the case in the universal life and T100 markets, it is long term premium guarantees that are affected.
For the last year permanent life insurance products have suffered because of persistently low interest rates. The increase in prices has now reached permanent and 75-year term critical illness (CI) products. In some cases, the jump in cost is as much as 20%.
On April 23, Manulife Financial was one of the first to increase pricing for several of its CI products. The insurer increased the base cost of insurance rates for non-smokers in its 15-year payable T100 permanent product by 20% across all ages and bands.
In an interview with The Insurance and Investment Journal, Steven Parker, assistant vice president of product and marketing for individual insurance at Manulife, said that the insurer was also increasing its prices for non-smokers aged 18 to 34 by 10% in its lifetime payable T100 and T75 products, raising rates for both the base cost of insurance and the return of premium at early surrender (ROPS) benefit. However, there was no change made to rates for return of premium at death (ROPD), nor were there any changes for issue ages of age 55 and over.
Everyone is pointing to the same factor as the reason behind the increase: low long-term interest rates. Sylvain Charbonneau, vice president of marketing and individual insurance products at AXA Inurance says that since low interest rates put pressure on the profitability of certain critical illness products, insurers are obliged to adjust pricing upwards.
In his opinion, CI products are following the same trend as universal life and whole life. He points out that insurance companies also raised the premiums on their permanent products (T100 and level cost of insurance) because of low interest rates.
Interest rate exposure
Mr. Charbonneau says that prices for life insurance products increased first because the volume of CI sales is smaller. He points out that the critical illness insurance market represents $100 million dollars in terms of premium volume, while the life market is about ten times larger. The exposure to interest rate risk is also lower in critical illness.
“This increase affects products that are sensitive to low interest rates,” says Mr. Parker. Long-term guaranteed permanent products are particularly affected.
At Desjardins Financial Security (DFS), the premiums for MaxLife (the traditional T100 product) have increased by about 9% as of April 15. AXA’s T100 will also see an increase in May, but at the time this edition was going to press, Mr. Charbonneau was not in a position to indicate how much. The refund of premiums at death and the flexible return of premiums that had been available in the policy are now available as riders. The T75 policy is no exception, and AXA increased its premiums by 5% on average. The return of premiums at death included in the policy is now available as a rider.
According to Alain Bédard, senior vice president of individual insurance and savings at DFS, increases are inevitable over the next 12 to 18 months. However, experts are unanimous in saying that it is difficult to estimate their extent.
“They will vary from one product to another. The shorter the return of premium period, the higher the increase. For reimbursements lasting 15 years, one could expect an increase of 5% to 10%. It might even be higher than that,” he says. That is not accounting for the fact that increases will also depend on what the competition does.
Besides interest rates, another risk factor that is forcing insurers to increase their rates is the new International Financial Reporting Standards (IFRS). Mr. Bédard states that they could have an effect on permanent products. If they are adopted in their current form, he believes that they could bring about a significant increase in premiums or several successive increases.
To avoid exposing themselves to risk, some insurers are relying on term products. This is the case at AXA.
“We are focusing our development and our communication with advisors on term products. We have been following this strategy for several years now,” says Mr. Charbonneau. He notes however that the market as a whole is very oriented towards long-term guarantee products. One thing is certain, he says: clients stand to benefit from this environment. He believes that now is the time to buy, before prices rise.
“Sales have achieved their momentum,” comments Ian Jack, living benefit product manager at RBC Insurance. He says that the insurer is not planning to increase its critical illness prices. “The company is reluctant to make changes,” he says. “But we could follow if the interest environment is still at a low point. It will depend on the competition.”
Insurers who want to increase the premiums of their products should seek to maintain this momentum. “They will have to look at the market place itself and the rate environment to find a balancing act,” says Mr. Jack. “They could increase rates for T65, T75 and T100 because they are sensitive to low interest rates. But the products sold represent a large percentage of the sales.”
Guy Papillon, vice-president, sales and special projects, Quebec and Ontario Blue Cross, said no increases are expected in the short or medium term. “We have, however, withdrawn some life insurance guarantees,” said. Interest rates are affecting pricing in general, but since the critical illness market is new, they have had less impact in this niche. It doesn’t represent the most significant percentage of our sales,” he says.
According to Mr. Papillon, IFRS will also have an impact on pricing. “Canada is one of the only countries where critical illness pricing is still guaranteed. In the coming years, we could be obliged to re-evaluate that, ” he said.
According to the Life Insurance Marketing and Research Association’s (LIMRA) Canadian Individual Critical Illness Sales report for 2010, permanent, limited period products (T75 and T65) accounted for 80% of premiums and 60% of policies sold in 2010. Term products (T10 and T20) accounted for the rest. The same LIMRA report says that growth in sales slowed slightly in 2010 compared to 2009. The annualized premium volume grew by 9% in 2009 compared to 8% in 2010. As for policies sold, that number increased by 2% in 2009 compared to 4% in 2010.