Successive rises in level cost of insurance resulted in a sales decline for universal life in the first quarter of 2012 compared with the same quarter in 2011.
Long-term interest rates are sitting below 4%. Pressured by the current environment, sparked by the 2008 crisis, insurers have been compelled to raise the prices of several products, eliminate some and transform others. Interest-rate sensitive level-cost UL insurance saw more than one price hike in 2011.
LIMRA’s preliminary data on first quarter sales of individual life insurance in Canada show that these price increases are starting to take their toll on the entire UL product portfolio.
Life insurance sales are healthy – universal life is the exception. Between the first quarters of 2011 and 2012, new life insurance premiums were up 7% in Canada, and the number of policies rose by 5%.
In contrast, new UL insurance premiums plunged by 19% and policies shrank 10% in the same comparison period. For the level cost product, premiums plummeted by 27% and policies were down 11% between these two first quarters.
“It’s not overly surprising given the events of last year. We’ve probably seen the worst of it,” Karen Terry, manager with LIMRA’s product research team, told The Insurance and Investment Journal in an interview. Of course there will be other increases, but maybe not as big, she adds.
After this interview, her predictions soon came true. On June 16, Manulife Financial boosted the prices of its level cost universal life products by 6% to 12%. It also raised the uniform cost of its critical illness product, and changed the premium payment period of its long-term care product.
The insurer cited the same reasons that advisors have been hearing for the past couple of years – interest rates are stagnating at historic lows and continue to influence the cost of long term insurance products. The company must raise pricing to ensure the viability of these products.
The average increase in level cost was 6.1% for InnoVision, 6.3% for Security UL and 12% for Limited Pay UL (term product). It affects most uniform rates of individual or joint coverage, including coverage additions to existing policies.
In its memo to advisors, Manulife pointed out that the increase varies by age of insured and health category. It is greater for younger clients, while some older clients will see no changes. “There are no InnoVision or Security UL level COI rate increases over age 60 for Healthstyle 3,” the document says. This category includes healthy non-smokers. The insurer puts 47% of its clients in this category, for all ages combined.
However, some InnoVision YRT to age 85/15 rates at older ages will rise. This increase affects all new contracts and coverage additions to existing policies.
Rates for the Term Life T100 product line are also rising. Family term and Business term products are affected for Individual or Joint last-to-die coverage, including coverage additions to existing policies. The rebate on annual premiums is being pared from 5% to 2%. Identical in structure to level cost UL, the pricing of T100 is equally vulnerable to interest rates.
New round imminent?
At press time in June, it was unclear who would be the first to follow Manulife.
Sun Life Financial, however, did not rule out the possibility of a new increase. “Interest rates for 30-year government bonds have continued to decrease since the last round of price increases. If interest rates continue to decline or stay at their current levels there could potentially be more increases,” says Hélène Soulard, Sun Life’s director of public affairs.
She explains that it is unlikely that this product line will see price decreases in the near future. “We have to remember that when Level COI UL was originally introduced in the Canadian market, the long term bond yields were approximately 9%...While a small increase in long term bond rates will have a positive impact, it is unlikely the increase will result in any “reductions” in Level COI rates.”
Saundra Edwards, assistant vice-president, individual life insurance marketing, for Great-West Life, Canada Life and London Life is not surprised at Manulife’s decision, “especially with interest rates remaining low.” She admits that an increase is one of several options being weighed at the GWL companies.
“Our expectations were that we might see more price increases and Manulife is the first. It will be interesting to see who will follow. On our side, we had two increases. Our last one was on February 2012. On a regular basis, we look at our products and regularly review if prices or features are sustainable. Manulife’s move is in our discussions,” Ms. Edwards continues.
Premiums are not the only characteristics of permanent products to be pressured by interest rates. Interest guarantees on fixed income options are also taking a hit. Manulife and several other insurers whittled away at this guarantee in recent months.
In February, Great-West and its insurance subsidiaries lowered the guaranteed rate on fixed income investment options. The five-year rate dipped from 2% to 1.5%, and the 10-year rate from 2.5% to 2%. Two years ago, several companies still guaranteed 3% over 10 years, yet insurers can hardly hope to obtain more than 2% today, Ms. Edwards points out. “We needed to pull back on the guarantees, to make sure the rate we’re paying is sustainable and we can match them,” she explains.
One thing is certain, Great-West, Canada-Life and London Life have encountered the sales downturn that LIMRA’s data shows. “We certainly saw a decrease in UL premiums but not as significant as in the industry (in general),” Ms. Edwards says.
Impact on sales channels
Since UL is a core product for the independent channel, Managing General Agents were impacted by these plunging sales. LIMRA reports that independent advisers saw lacklustre growth in the first quarter of 2012, with a major decline in universal life and a modest gain in whole life business.
Total sales for independents were down 1%, while those of career agents advanced by 20% in the first quarter of 2012, compared with the same quarter of 2011.
Managing General Agents confirmed this phenomenon. Universal life insurance sales of S_Entiel, an MGA based in Laval and member of the Groupe AgenZ, declined by 12%, for both the number of cases and premiums, CEO Réal Bolduc confirms.
Level cost insurance saw the biggest downturn, while YRT UL insurance continues to perform well, he says. The many announcements of impending level cost increases prompted a sales frenzy in late 2010 and last year, Mr. Bolduc says. It would be impossible to replicate this surge in the first quarter of 2012, with many increases already in force.
“Advisors scrambled before the increases took effect. We received many rush proposals. In the first quarter, overall business was down due to price increases. The permanent product was hit hardest. Universal life YRT grew modestly,” Mr. Bolduc continues.
Typically, Mr. Bolduc points out, life insurance sales are not vigorous in the first quarter of the year.
Volatility is the prime culprit behind sluggish universal life insurance sales at Ten Star Financial Services, an Ontario-based MGA. CEO David Baird attributes the drop in universal life insurance sales to stock market behaviour.
In UL, Ten Star targets the wealth management market. Nearly 95% of the universal life policies that TenStar sells are level cost and minimum premium. The surplus is often placed in stock market indices.
Stock market performance
“Stock markets performed poorly. It had a really big negative effect on sales because 10 year performance on equity options inside UL really did not perform very well,” Mr. Baird says.
This contrasts with last year, when stock markets behaved reasonably well, Mr. Baird explains. In recent months, the European situation has been riveting the media and affecting markets, he observes.
Yet Mr. Baird is optimistic. Sales of universal life insurance to businesspeople as a tax shelter are steady. The cost of joint last-to-die policies is still very attractive, he adds.
But, if universal life sales are faltering, other products are rising stars in the distribution network, Réal Bolduc says, giving the example of living benefits. “In any area, price increases trigger a slowdown. The wheel continues to turn for advisors: if they sell fewer level cost policies they will turn more to YRT because people will not stop buying universal life,” he says.
For insurers, inflation can have a silver lining: it’s prime time for a portfolio remix. Sun Life has focused on managing its product mix in recent years, with the hikes providing a good opportunity to step up this strategy. “Re-balancing the portfolio was definitely a positive outcome of the changes to Level COI,” Hélène Soulard says.
This balance is important in any industry, she adds. However, she insists on the fact that the increases are mainly a response to low interest rates.