As insurance companies continue to raise rates on level COI universal life products, managing general agencies have a range of views on how the sales and the sustainability of this core product line will be impacted in the future. Paul Brown, chairman and CEO of Worldsource Financial Management and IDC Worldsource Insurance Network, says he has two perspectives on the recent round of price increases. First, he understands why insurers are raising rates. “The products as they are priced aren’t sustainable because they weren’t priced with an extended period of historically low interest rates as an assumption.”
However, from his view as an MGA, the pricing trend is problematic. It will impact sales because as those products go up in price, the viability of them as a solution is impacted.”
At press time, Manulife Financial and Empire Life had announced new pricing increases. Last year Manulife also increased pricing for this product line and several other insurers followed suit.
Many in the industry believe that Manulife’s decision to raise pricing once again will lead to another round of pricing increases industry-wide. Mr. Brown says he certainly expects this to occur. “Yes, absolutely. The insurance companies are all in the same boat. They’re all dealing with the same issues. They’re all in the same interest rate environment. They’re all under the same capital constraints and profitability requirements. I would say a lot of them are probably relieved that Manulife has done this and it will give them another chance to raise prices.”
Mr. Brown adds that for advisors, such increases may have little impact in some sales cases, but in certain price-sensitive situations, he does think sales will be affected. Examples of where higher pricing could become an issue are back-to-back annuity situations; when a client is looking to convert to UL; or when clients are looking at alternatives to insurance. “If the return on the insurance solution is decreased, it might make them look at other solutions.”
Level COI UL is a core product for his MGA, accounting for at least one-third of premium sales. In the short-term, Mr. Brown expects a sales spike as advisors try to make sales before the new pricing comes into effect. However, he doesn’t expect this sales surge to be as dramatic as the one experienced last year when Manulife announced its first pricing increase. “A lot of that pent up demand may have already been exhausted.”
Over the long-term, however, Mr. Brown does predict a downward sales trend for this product line, although he has not seen a sales slowdown yet. “I would project into the future that we certainly have to be positioned for probably selling less level COI UL and it could be potentially more difficult to market some of the longer term guaranteed products as they become less attractive.”
Mr. Brown adds that the pressures experienced by insurers are filtered down to the MGA system. “If there is pressure on insurers, we’re in lockstep with them. We’re totally dependent on them for our products and services. So, if they’re under pressure, then ultimately we will be under relatively the same pressure. If their products are less competitive and less marketable, then that’s going to impact the MGA system.”
If insurance companies have to withdraw or alter products, that’s going to affect MGAs he adds. “The MGA system has evolved to a business where predominantly our main profit centres are these long-term guaranteed products…So if those products are compromised, then it is going to impact us, definitely. An MGA is not going to survive just selling term insurance.”
Jim Virtue, president and CEO of PPI Solutions does not believe the beginning of the latest round of pricing increases in the level COI UL market will have much of an impact on current sales, but the sustainability of this product line is in question, he says.
“I think we will see some companies withdraw from the marketplace. We will see some products disappear but what I also believe…. we’re going to see new, innovative products designed by insurance companies coming to replace these products.”
Level COI UL would represent from 30 to 40% of premiums sold for PPI Solutions, which he believes is a typical sales level among MGAs. “In the MGA market place, level COI is the main product used for a permanent insurance product, which is used for estate planning.”
If level COI UL eventually disappears from the Canadian market, it’s going to change the product landscape, but it certainly isn’t the end of the insurance industry in Canada, he emphasizes. He adds that level guaranteed products available in the Canadian market are unique in the world, but this doesn’t stop the insurance industry from thriving in other countries. “This is a big change coming to the industry, there is no question about that. But, I don’t have any doom and gloom about this.”
Mr. Virtue says he believes there will always be good quality, viable insurance products available both on the estate planning and the family protection side. These products might not look like the products available today, but on the positive side, insurers will be forced to be more creative and proactive in developing quality consumer products, he predicts.
As an example, he points to Manulife Financial’s new Synergy product. “It doesn’t have a level cost of insurance component; I think it is an excellent product. The game is just going to change. I don’t think the game is going to end.”
How is he preparing advisors for this changing product landscape? “I still believe for the next several years that there is going to be level cost of insurance products. So, I think the preparation of the advisor will take place over time and it will be by making sure that they are aware of all the new, innovative products that are coming out.”
Mr. Brown thinks level COI UL will not disappear, but will be less attractive for younger clients. “I think it continues to be relatively viable at older ages because of the shorter duration of the risk. (Insurers) can afford to mitigate the impact of interest rates. I think at younger ages you’ll see less and less of it sold. The upside of that is if interest rates go back up, the product could reappear. It will become viable again.”
Both Mr. Brown and Mr. Virtue note that through their marketing efforts, insurers are trying to encourage the sale of yearly renewable term universal life (YRT) over level COI UL.
“They want to sell UL, but they want to sell UL that they think they can make a profit on and that’s why there is this push toward YRT mortality, which doesn’t have the interest rate risk that level COI does,” says Mr. Brown. “From a capital perspective, they do not have to put up the capital they would have to put up on a level COI.”
Will this marketing focus succeed to shift sales away from level products? Mr. Virtue doesn’t believe so. “I think as long as level cost of insurance products are available, that the advisor will continue to gravitate toward those products unless the price increases really do become prohibitive.” Even with the recent increases, Mr. Virtue does not believe this to be the case yet and he expects PPI Solutions sales in this market will continue at close to the same amount of premium as usual.
He adds that he agrees with the trend of raising rates in the level COI UL market, adding that it is a positive sign for the health of the insurance industry. “I actually applaud Manulife for raising the prices again. It is what they have to do. I don’t expect them to sell products where they lose money and I think the product is still a very good product even at this new price. Whether it continues on is the issue.”
Kevin Cott, CEO of Qualified Financial Services takes the view that this round of pricing increases will have no impact on sales, other than an initial spike prior to the new pricing coming into effect. Advisors will rush to bring in all of the sales they were actively working on to capture the lower rates, he explains.
“Initially it always causes a bit of a positive blip and then realistically after that, the reality is like anything else in life people get accustomed to everything and life goes on. So we’re not going to stop selling insurance because a rate has been raised…Right now it just is what it is. It’s part of the business. I don’t see it as a concern or an issue or a negative in any way whatsoever. Zero.”
Neither is he concerned over the sustainability of level COI products. “Whether it was whole life with values, or whole life non par and later just stripped down Term to 100 or term to 100 with values, this product has been around for a long, long, long time. In fact level COI is really the foundation of the industry going back 150 years. So to think the product may no longer exist would be to me very, very, very surprising.”
Won't deter sales
He does not believe that pricing increases will turn clients away from the product. “If you present the solution properly and you know how to help people find the money, then at the end of the day it doesn’t really matter. I don’t believe a consumer in any sort of commodity environment questions the pricing. They understand that prices fluctuate. They saw it in the car market, they saw it in the cost of groceries, the cost of gasoline, they see it in everything.”
Mr. Cott recalls seeing a lineup recently at a gas station because the price was $1.18 per litre. “Not long ago people would have complained at $1.18 and now they’re lining up for it.” He believes it will be a similar situation for the level COI market. “Right now insurance is a bargain. I think the industry has known that for quite some time. Consumers may not feel this way because we may not have done a good job as an industry of telling them that it’s been a bargain.”
BY DONNA GLASGOW