New capital rules are requiring insurers to review their segregated fund products and changes are likely to come, expects Michael Ondercin, Manulife’s assistant vice president of guaranteed investment products. Released in December by the federal regulator, the Office of the Superintendent of Financial Institutions (OSFI) and effective January 1, 2011, these new rules are an interim step to capital rule changes for segregated funds and part of a general overhaul of capital rules for insurers.
Mr. Ondercin explains that the new interim rules require insurers to consider more adverse scenarios, requiring companies to hold capital for lower overall market returns. The result is the amount of capital that insurers will have to reserve to cover seg fund guarantees will go up. By how much will be different for each insurer, depending on many factors such as “the types of guarantees you have, the types of clients who buy your product, the assumptions you make. It is a very complex exercise to go through…”
While insurers had very short notice to adjust to these new rules, they were aware of OSFI’s general direction following a consultation period last fall.
However, there were a few unanticipated changes, says Mr. Ondercin. “The big surprise for us was the new rules would not only apply to new contracts that were being opened…but any supplemental deposits into existing contracts,” he said, adding that it had previously been communicated to insurers that the changes would apply to new contracts only.
Due to this change, in January Manulife announced that some of its older seg fund products would be closed to new deposits effective April. These older products were already closed to new sales back in 2009.
The reason that Manulife has decided to close deposits into these old contracts is that any new deposits would have had to be made under a different set of capital rules than previous deposits. This would make them very complex to administer. “Under the new capital rules, they just didn’t make sense anymore. So that’s why we’ve closed off deposits into all those older guarantee products.”
Mr. Ondercin says he believes other insurers will be forced to make similar changes due to the new rules and he expects more adjustments to come. “I think you’re going to see companies scale back on certain types of guarantees.”
In particular, products that still have 100% maturity and rich death benefit guarantees will be most challenged, he expects.
Because Manulife stopped selling such guarantees two years ago, Mr. Ondercin doesn’t expect major changes to the company's products going forward. “But we are still conducting the complete review and looking at the impact of the new capital rules because these are quite complex. So it is a little early to say what exactly the new capital requirements will mean and if any product changes will be necessary.”
Since these new capital rules are an interim step, more changes are expected as OSFI continues to tweak the capital rules over the next couple of years, Mr. Ondercin says. He, adds, however that having these interim rules clarifies the regulator’s direction for insurers. “We know the parameters where OSFI is looking for overall returns to be, what the downmarket scenarios are going to be...Our belief is the worst is behind us now. We can start ensuring that our products fit within the new rules.”
This is good news, he adds. “We can now build products with more confidence that they’re going to meet the criteria of the new capital rules versus always being worried what the new capital rules are going to be. “
Asked about his outlook for the segregated funds market, Mr. Ondercin said that “The reality is this is still an industry in transition, not only in Canada but around the world. Companies do need to adapt to the new capital rules. Manulife believes that these products do address real needs of clients like no other products that are available…” He concluded by saying that “Manulife is committed to the seg fund category in Canada. We plan on continuing to be a market leader.”