From product design to pricing, the segregated fund market is seeing an upswing in innovation as insurers fight for a bigger slice of this highly competitive market.

The recent introduction of a "one decision" product idea imported from the United States, namely the guaranteed minimum withdrawal benefit (GMWB), shook up the market in 2007 helping Manulife Financial, Sun Life Financial and Industrial Alliance to gain market share over the last year. A mix between an annuity and a retirement income fund, these plans are proving to be just as popular in Canada as they are south of the border.

"Really, the major driver of the increased sales was the April introduction of SunWise Elite Plus," says Paul Fryer, vice-president of individual product development at Sun Life. He suggests that much of the demand is driven by demographics, and that there are more new sales to come. As the babyboomer generation approaches retirement, he believes they will want products that will allow them to stay in the markets and generate income, but that also offer principal protection.

New money

In interviews with The Insurance Journal, both Sun Life and Manulife reported that the cash flowing into their GMWB plans was mostly new money originating from outside of their asset base, and not "cannibalized" business from internal transfers. Some of these funds may have been coming from bonds, GICs and fixed income mutual funds, but a portion may have been stolen away from the competition.

As insurers fight to gain business, Doug Conick, vice-president of investment fund products at Manulife Financial believes there will be more design changes, not only within the GMWB niche as more providers tweak their plans to offer a lifetime benefit guarantee, but also within the product class as a whole.

According to Investor Economics, Transamerica Life Canada lost the most market share last year. The insurer gave up a full percentage point, dropping from 7.6% in 2006 to 6.6% 2007.

Geraldo Ferreira, vice-president of investment products development and management at AEGON Fund Management and Transamerica Life gives a number of reasons for why the firm has fallen behind.

One culprit is currency risk. A significant portion of Transamerica’s segregated funds are in the global balanced and foreign equity categories. As the Canadian dollar gained strength against other currencies over the course of 2007, that hurt fund performance and trimmed the insurer’s asset base.

He also attributes part of the decline to redemptions out of older, closed blocks of segregated fund contracts. While Transamerica does not have specific data about where money goes when it leaves the firm, he does note that the introduction of GMWBs was well timed. "It definitely is a very attractive product that combines the strengths of a death benefit with a withdrawal benefit," he says. "It’s just ideally suited for the boomer market."

Transamerica is currently working with it’s parent company AEGON USA, tapping its experience to design and price a GMWB plan for the Canadian marketplace. Mr. Ferreira expects it will be launched before the end of 2008. "I would think that in the next five years, every major insurer in the seg fund market will be offering a GMWB product," he says. "Some companies have said they’re not looking at it,
but I don’t see how you can not, given the success that Manulife has had, and the fact there is a huge market out there that wants some guarantees around their income, and the success of these products in the United States."

Fees are one area to watch. Manulife has already created an elite pricing class that gives a price break of 75 to 50 basis points (depending on the type of fund) to those with more than $1 million to invest. Jim Gibson, director of wealth product marketing at Empire Life, notes that Empire’s low management expense ratios are generally lower than the industry average, and that this played a big part in helping them grow market share by more than half a percent last year. He says it’s possible other insurers will attempt to bring their MERs down over time.

Bundling, where seg funds are paired with other products and services, is another trend to look for. Mr. Fryer notes that in the United States seg funds have been bundled with long term care policies to provide a comprehensive package to see clients into their old age. Retiring Canadians are going to face similarly complex problems, he says. Paired with the right health care product, segregated funds could be an attractive solution.