Where's the crisis? Not in group insurance apparently. Profits in this segment grew in 2008 and the most recent results from 2009 show steady gains.
Insurers took $29.1 million in profits from their Canadian group insurance activities in 2008. According to the Fraser Group's Group Universe Report 2008, insurers saw an increase of 7% in revenue coming from group insurance activities over 2007. The 2009 third quarter results, released by the insurers a few days before press time, show a sustained level of sales in this sector.
Insurers say that cutthroat competition, hard bargaining, and clients who are shopping to reduce rates characterize the current marketplace. This can sometimes give volatile results. Manulife Financial's last two quarterly reports give an idea of these peaks and valleys. In the third quarter, Manulife reported a gain of 12% in its group insurance sales compared to the same period in 2008. But its group sales in the second half of 2009 had fallen by 94.6% compared to 2008, dropping from $914 million to $49 million.
"Our quarterly premiums can vary widely from quarter to quarter based on business volumes and specific contracts, and we generally do not disclose specific group sales contracts for competitive reasons," explains Tom Nunn, Assistant Vice President of human resources and communications at Manulife.
At Industrial Alliance, they are congratulating themselves on having experienced neither gains nor losses in group insurance during the third quarter of 2009 when compared to the same period a year earlier. In the third quarter of 2009 the insurer saw profits of $247.9 million, which is about $100,000 higher than in 2008.
Industrial Alliance's group insurance premiums grew by 2.8% compared to 2008. The insurer notes that employee plan sales have picked up thanks to an array of small groups.
Great-West Life, including its Canada Life and London Life subsidiaries, has seen a modest but steady rate of growth since the beginning of the year. Its group insurance premiums grew by 2.8% in the third quarter compared to the same period in 2008, rising from $1.605 billion to $1.659 billion. In the second quarter of 2009, the insurer experienced a 2.9% rate of growth in group premiums compared to the same period in 2008.
At Sun Life Financial, group insurance premiums increased by 7.6% in the third quarter of 2009 compared to the same period in 2008, reaching $1.723 billion. Sun Life had the wind in its sails in the second quarter of 2009, reporting group insurance sales of $1.8 billion, representing a gain of 14.5% over the same period in 2008.
At press time, third quarter results for Desjardins Financial Security (DFS) were not yet available. In the second quarter of 2009, DFS saw a $552.3 million increase in group insurance sales volume, which was a 3.5% gain compared to 2008. Standard Life Canada reported $159 million in the second quarter for a 5.3% gain over the same period last year.
A Hidden crisis?
The impact of the recession may remain to be seen given the limited information available on the other factors that influence this business sector. "Our most recent data ends in 2008. The others are unofficial. What we know for 2009 is that things are not bad, but things are not wonderful," said Ken Fraser, President of the Fraser Group in an interview with The Insurance Journal. He was asked to speak at a conference held by the Canadian Institue of Actuaries in Ottawa on Nov. 19 and 20, and shared some of the highlights:
"I don't say there's no relationship between LTD (long-term disability) results and macroeconomics. I say that it's not the obvious relationship people are expecting," he comments. An important source of revenue and a puzzle for actuaries because of the high levels of reserves it requires, long-term disability is a benchmark of group insurance profitability. There may still be correlations hidden behind the lack of current data," he commented.
"My figures show no obvious relation between the recession and LTD results but I have to add a caution here: my figures only go back until 1991. We're experiencing the worst recession since the 30's. I have national numbers on the economy and industry and they don't correlate. If we have more precise numbers, let's say Ontario, Quebec, construction sector, age and occupation of an employee in a given group, we might see a relationship."
According to Mr. Fraser, these variables could come together and either exacerbate or improve the recession's effect on long-term disability insurers.
Effect of layoffs
Rounds of company layoffs during the recession have also deprived insurers of group insurance premiums. Another effect of layoffs is that, since it is often the newest and therefore youngest who are first to be let go, their departure worsens the group's risk pool. In addition, if the recession pushes companies into bankruptcy, that represents even less premium income. "That's why some credit underwriting occurs right now," comments Mr. Fraser.
Mr. Fraser is also seeing insurers tighten their risk selection and claims management during the financial crisis. These practices may help to diminish the recession's effect on group insurance results. As for increased medication costs, that's less of a problem than in previous years. Johanne Brosseau, principal consultant in health management at Groupe-Conseil AON, notes that drug expenses have only increased by 6%, which is less than in the past. "The growth curve in drug costs experienced in group insurance plans is beginning to level off," she says.
Insurers say they experience an increased severity in risk selection during times of crisis. SSQ Life has been evaluating its clients' financial situations more closely since the beginning of the recession, "both at renewal and for new accounts," says Carl Laflamme, Vice President of sales, marketing and national development. "If we are dealing with a company that is conducting layoffs or that is in a difficult situation, our attitude will not be the same. We will ask more questions during the application process."
The closure of client companies has had little affect on SSQ. However, the insurer has been affected by layoffs, but is not overly concerned. "If there's a pick up, these companies will rehire." The insurer says that it is heading for a record year. "The fact we won the group insurance contract for the city of Montreal at the beginning of the year helped a great deal," says Mr. Laflamme.
Sun Life, for its part, says that it has always been very selective, but Josée Dixon, Sun's Regional Vice President of business development for eastern Canada, goes on to add that, since November 2008, the insurer has been checking the client's credit history for every group application received.
Current circumstances have made insurers more suspicious, explains Ms. Dixon. "Why is this group going to market? The verification process is more complex, but the principle remains the same: set an appropriate rate and make certain that we are building a relationship with the client that is not just short term. The client doesn't want to wind up with a sudden increase of 20% either," she says.
Ms. Dixon also believes that the current situation will lead to a certain stability in plan design. "Clients prefer not to make changes to their plan unless it is necessary. In a difficult economic situation, these changes can lead to conflicts and insecurity among employees."
Sun Life says it has been less affected by layoffs this year compared to 2008. Ms. Dixon also believes that the layoffs are temporary. "2010 will bring better days," she predicts.