Munich Re said it in black and white: cutthroat competition is driving companies to price some universal and term life insurance products below the break-even point.
Munich Re's Pricing Survey 2002 highlights the effects of competitive pressure on some insurance products. The 11th annual survey of non-participating policies was conducted this past spring among 32 insurers, or 95% of the Canadian market.
One sign of crushing competitive pressure is that level universal life insurance products were loss leaders, say the actuaries that participated in the survey. The policy commonly called joint-last to die (designed to cover both spouses, but benefits are paid only at the death of the second spouse), is a case-in-point.
In fact, 80% of respondents admit that they priced joint level universal life below the break-even point. This strategy takes a good-sized bite out of sales: 27% of level universal life insurance products are sold jointly.
Respondents accuse their competitors of more rampant price-cutting. They estimate that between 90% to 100% of their peers underprice this product.
Level universal policies established on an individual basis are equally vulnerable to underpricing.
In total, 70% of actuaries consider that this product is priced below the break-even point, while 90% of all participants believe that their competitors are doing the same.
What's more, it is an open secret that term insurance is a loss leader at several companies, especially renewable T10 and T20.
Yet far fewer respondents - barely 30% - admitted to under pricing this product compared with level cost universal life.
The perception of the competition is a totally different picture. Respondents estimate that 70% of their competitors underprice term.
Majority still profit
Despite pervasive underpricing, 58% of insurers surveyed attained their profitability objectives in 2001, while 31% fell short by a margin of less than 1%.
Mary Simanikas, Senior Vice-President, Individual Life Services, at Munich Re, is thrilled with the results. "In fact, overall, more than two thirds of companies, or 89%, actually reached their target or came within less than 1% of it, which is much better than in previous years."
The annual study also found that yearly renewable term (YRT) sales far exceeded those of level term, effectively closing the gap between the two types of options.
As usual, the Munich Re survey identified the key competitors in universal and term life insurance. The reinsurer noted that this section of the survey lists only the insurers cited by 10% or more of respondents.
In term insurance, competition is fiercest among the products of three companies: Transamerica (leading for the fourth consecutive year), Canada Life and Manulife.
In level universal life, Manulife dominates the sector, Transamerica placed second and Standard Life third. In yearly renewable universal life, Transamerica regained its supremacy, followed by AIG and National Life.
Ms. Simanikas predicts that universal life year renewable term (YRT) charges will suffer the most from the stock market slump.
In tandem with the under-pricing of universal life premiums, the minimum continuing capital and surplus requirements (MCCSR) are also sliding.
According to the 32 participants, the MCCSR stood at 239% on average in 2002, its lowest level in four years. The MCCSR reached 247% in 1999, peaked at 281% in 2000 and then slid to 244% in 2001.
The 2002 survey features a much more detailed description of expenses than in previous years, Ms. Simanikas said
The report states that nearly half of respondents took all of their expenses into account when setting their premiums.
Specifically, expenses account for 35% to 40% of the present value of non-participating life insurance premiums. Half of these expenses are allocated to compensation of financial advisors.
Ms. Simanikas said this percentage is par for the course. Even if companies are tightening management of their expenses, she does not think that brokers' commissions will be affected over the medium or long term.
She added that within the next five years, insurers will increasingly turn to subcontractors to outsource.
If insurers succeed, she continued, they will boost profitability, and the insured could benefit from the savings generated.
As for where universal life insurance premiums are heading over the next few years, Ms. Simanikas said that the competition will have the last word. "I suppose pressure will go that much lower. Companies watch the increase of prices, but it seems that everyone else wants someone else to do it first. Companies know that if they go first, they could lose market share."
Ms. Simanikas also mentioned that critical illness insurance and long-term care insurance top the list of products on companies' to-launch list.
Munich Re plans to emphasize expense and growth management following a merger or acquisition. "I think that the deep concern of companies is now that they are acquired by a company, how can they still continue to grow?"