The cost of segregated funds is going up. This sector had been relatively immune to price increases compared to life insurance business, where level insurance costs continue to rise.An early mover in the shift towards higher level cost of insurance (COI) pricing in universal life that started in Dec. 2010, Manulife Financial is taking a new tack to alleviate market pressure. As of Jan. 1, the insurer is increasing fees for segregated fund guarantees on new business in its GIF Select funds, as well as the GIF Select (original version) funds. The Insurance and Investment Journal has learned that this increase will affect IncomePlus version 1 and version 2 products, as well as EstatePlus.
This is only the beginning. As of May 1, existing segregated fund contracts will also be subjected to increased guarantee fees. On April 30, Manulife will adjust its fund lineup, closing some and adding others. Other existing funds will undergo a name change. In addition, a “small contract” fee will be apply to certain contracts entered into as of Jan. 1.
Adverse market conditions
Manulife explained its reasoning in a recent message to its distributors: “Recently Canadian financial regulators announced updated requirements for insurance companies regarding the amount of money they are to set aside in order to cover guarantees made to their customers. These changes, compounded by recent adverse market conditions, have made it necessary for Manulife to re-evaluate the costs associated with the GIF Select and GIF Select (original) contracts. As a result, the guarantee fees for IncomePlus and EstatePlus will be increasing.”
In new funds, and later on in existing funds, IncomePlus fees will increase by 0.20% to 0.40% and those of EstatePlus by 0.10% to 0.20%. A fifth level has been added to the four existing fee levels, and the fees will be 1.25% and 0.65% IncomePlus for EstatePlus respectively. Five IncomePlus funds and five EstatePlus funds, all at Level 4, will move to Level 5. Costs are higher at each level. For example, Level 1 consists mostly of bond funds while Levels 4 and 5 include asset allocation, income, and growth funds.
While Manulife struggles with market volatility, low interest rates are forcing other insurers to reconsider their life insurance pricing. Industrial Alliance has announced that, as of Dec. 5, it is increasing premium rates on a wide range of permanent products.
In an announcement sent to financial advisors, the Quebec-based insurer indicated that the move was “a direct result of continual declines in long term interest rates to historically low levels”, and said that it was required to take action if it was to maintain its guaranteed product offering.
The 16-55 age band in Industrial Alliance’s universal life product line is the hardest hit, where the company has increased the cost of its Genesis IRIS Level product by 16%, and the price of the Genesis by 12%. The cost of T100 for the 16-55 age band is going up by 10%, while premiums for L20 and L65 whole life products for the same demographic are increasing by 6% and 7% respectively.
Equitable Life will also increase the price of its universal life products as of Jan. 4. The affected products include the Equation Generation IV Universal Life, as well as EquiLife Limited Pay Universal Life. Price increases in the level COI product will average about 10% for Generation IV and 9% for limited pay products.
Long term interest rates
The insurer blames persistently low long term interest rates, something to which guaranteed returns for investment options in universal life contracts are particularly sensitive. In a message sent to its distributors and obtained by The Insurance and Investment Journal, Equitable Life noted that interest rate assumptions are key to the pricing of life insurance products with investment components offering guaranteed long term returns. The insurer said that it was increasing prices to ensure the viability of its products.
As 2011 was drawing to a close, Sun Life Financial announced that it would also need to increase prices. As of Jan. 7 it will increase the price of its SunUniversalLife and SunUniversalLife MAX level cost of insurance products. The insurer notes that interest rates are at low levels not seen since 1948, and continue to decline. The largest cost increase is 20%, and will affect customers aged 16 to 49 who are insured for $250,000 and more. The same age bands will also be affected for coverage levels of less than $250,000, where the average increase will be 16%.
At the same time, Sun Life has announced sharp cuts in spending, cutting management and other positions in several offices across Canada. The company also reduced its team of long term care specialists to a handful (see article, page 14).