Changes continue to shake up the guaranteed minimum withdrawal benefits (GMWB) market. To reduce risk exposure, some insurers are dropping 15 and 20-year payout options in favour of the lifetime benefit options.
Manulife Financial, for example, recently launched the second version of its IncomePlus product. Along with other changes, this version does not offer the 20-year payout period.
Another major change in this market is the entry of Great-West Life, which is offering a guaranteed lifetime income benefit. Great-West, Canada Life and London Life added a lifetime benefit option to its segregated funds on October 5. "Starting at age 50, you can get a lifetime income," says Alf Goodall, Vice President Marketing, Individual Pension and Investments.
When it launched its lifetime benefit option, Great-West decided not to offer a guaranteed withdrawal benefit payable over a limited time, generally 15 to 20 years. "The 20-year term income is not what our clients are looking for," he says.
When they entered this market in 2008, Transamerica Life Canada and Empire Life also restricted their benefits to a guaranteed lifetime income benefit.
"What we’ve heard over and over again from advisors is that the term option is really not that desirable to them. In fact, they felt it had risk because you have to convert at age 65, potentially reducing the income that you are taking and they didn’t want that."
Mr. Goodall added that "It is interesting that Manulife…is not offering the term at all; they have no income prior to 65 in their new IncomePlus," he pointed out.
Michael Ondercin, Manulife’s Assistant Vice President, Segregated Fund Product Management, says that the change will simplify the product. "Advisors and clients found it very confusing that we had a guaranteed withdrawal amount and a lifetime withdrawal amount together, that were sometimes not the same amount."
Some advisors are disappointed by the changes in the GMWB market. John Hamilton, President of a large Canadian managing general agency, Financial Horizons Group, confirms that representatives "are disappointed because they can’t offer those features. But, this is the new reality. There will be changes. They (advisors) will adapt," he said.
In Manulife’s revamped IncomePlus, clients can no longer choose between the two guaranteed income options. They must purchase guaranteed lifetime income, available starting from age 65. The previous version had a term guaranteed income option that allowed clients to receive income earlier (see inset text).
Mr. Ondercin explains that guaranteed income over a 20-year period has been discontinued because "Very few clients in our current block of 100,000 contracts have taken income prior to age 65 and our research indicates most clients will wait until at least age 65 to start income."
Mr. Goodall, of Great-West, sees things differently. He cites a Statistics Canada study that finds that 74% of Canadians will retire before age 65. "On average, they retire around age 62. So, having the solution ready when they are, I think is a big benefit," That is why Great-West enables its clients to receive lifetime income starting from age 50, he says.
Manulife is not the only insurer to have cut its term income option. Desjardins Financial Security announced in July that it suspended sales of its 15-year term guaranteed income option and is offering only the lifetime benefit option. The company is currently reviewing its product with a view to lowering risk.
"Was it too good to be true? I don’t know," says Mr. Hamilton, of Financial Horizons, commenting on the trend. He points out that the product changes indicate that they were too risky for the insurers and adds that he is not surprised by the recent changes in the market. "We’re probably fortunate it didn’t happen sooner…we were able to get a lot of clients in…"
The evolution of the seg fund market reminds Mr. Hamilton of the development of the critical illness insurance in Canada. "The early products were rather inexpensive but companies had to reprice after they gained experience in the market," he explained.
In its most recent report on the life insurance industry in Canada, A.M. Best notes that "The major segregated fund players have begun introducing new products to properly reflect the price of the risks associated with the guarantees, as well as hedging more of the inherent risks."
Asked to comment on the transformation of the segregated fund guarantee market, Neil Skelding, President and CEO of RBC Insurance, says that sustainability has become a critical factor. He thinks we’re seeing the entry into the market of sustainable products, some of the "exotic features" are being removed that have caused issues for companies. Mr. Skelding said that RBC Insurance’s product would be "staying away from anything that would guarantee equity market returns, certainly at the levels that were being offered."
Entering the market
RBC Insurance does not yet offer a GMWB product, but has plans to do so. Mr. Skelding says that the need is clearly there among clients. "It is taking longer than expected to enter this market. We first want to ensure that the product is competitive and sustainable," he explains.
RBC Insurance has not set a launch date. In addition to the guaranteed lifetime benefit option, the company has not ruled out offering 20-year payout option. "Various options are on the table," says Mr. Skelding.
In November 2008, Standard Life Canada scrapped its plans for launching a guaranteed lifetime benefit option in 2009. It has not yet announced any plans to add this benefit onto its product line.
AXA Assurances also made an about face on its stated intentions to enter this market. At press time, the insurer announced the closure of its segregated fund line and, consequently, will not be offering a lifetime income option (see article on page 12).
Other players already present in the guaranteed withdrawal benefits market – Sun Life Financial, Industrial Alliance and SSQ Financial Group – still offer both types of benefits for a specific payout period and the lifetime benefit.
Sun Life does not plan to change its 20-year minimum withdrawal option this year, says Hélène Soulard, public affairs manager. She adds, however, that a new generation of products will eventually emerge, but "it is too soon to discuss them because we haven’t even prepared the information for advisors yet. We’re currently working on our products," she adds.
Last summer, Sun Life did announce a number of risk mitigating changes to its seg fund product line, which included closing funds to new deposits that featured the full 100% maturity and 100% death benefit guarantees and increasing the GMWB rider fee. For new contracts, at least 30% of a portfolio must be allocated to fixed income investments (see page 3, June/July 2009).
At Industrial Alliance, Jacques Carrière, Vice President, Investor Relations, says that the insurer is pleased with the pricing and features of its GMWB product. "We’re not in a hurry to make changes," he says. Mr. Carrière adds that the products are reviewed regularly to keep them competitive.
SSQ is on a parallel track: "Currently, we do not plan to modify our product," says Élaine Dumais, Director, Corporate Communications. For now, SSQ is still offering clients the 20-year payout option.
Ratings agency A.M. Best forecasts additional changes in the industry to reduce the risk associated with segregated funds.
Great-West bided its time before launching a guaranteed withdrawal benefit product. Manulife paved the way with IncomePlus in 2006, and several companies have since entered this booming market. Today, eight companies currently offer this type of benefit in Canada.
Asked why Great-West took its time getting into the game compared to its main rivals, Mr. Goodall explained that the insurer was not comfortable with the market’s direction. "We wanted to make sure that the price, the fund mix and the product design were appropriate before launching the product. Then 2008 caused us to pause and really reflect on what was happening in the market and make sure we had the proper product structure going forward."
He adds that the timing is in the company’s favour since investors are looking to get back in the market.
Segregated fund sales exploded in recent years, largely because of the guaranteed withdrawal benefit products. In the first half of 2009, net sales of segregated funds topped $2.5 billion.
Great-West’s rivals overtook it in seg fund market share due to the fact it lacked a guaranteed withdrawal benefit option. In June, Great-West lost its leadership position in segregated fund assets under management to Manulife. Mr. Goodall is convinced that the addition of a guaranteed lifetime income benefit will propel the company back to the top and help it take back the lost market share. "There is no doubt, our lifetime income benefit will be a contributor; it’s a big market."
Mr. Hamilton of Financial Horizons predicts that Great-West will make up its lost ground in the segregated fund market with its new guaranteed lifetime benefit rider. "Great-West is probably going to catch up quite a bit. They had the benefit of not being in this market in the last couple of years. Manulife has a bigger block to worry about."