Regulation and other business pressures are driving change across the industry, explains Terry Zive, Advocis member, chair of government relations at CALU, and president of Zive Financial Inc.
On the regulatory front, Mr. Zive points specifically to the exempt test review, first announced in the 2012 federal budget. The exempt test rules govern excess mortality charges or premiums, which are invested by policy holders in accounts offered by the insurance company. Although the exempt test rules have undergone minor tweaking since they were introduced in 1981, there have been no substantial changes made or proposed, until recently, when the Department of Finance released its consultation paper on the subject.
In response, the industry formed two working groups to review the paper and provide feedback on behalf of companies, and on behalf of the advisor community. The CALU working group, representing advisors, plans to highlight three areas of concern:
First, it would like to ensure the majority of product designs can still be offered to clients on an exempt basis so that income earned in the funds are sheltered from immediate taxation. It is also hoped companies will be given sufficient lead time to revise their marketing, administration, and tax systems so new and existing business is not disrupted. Finally, the group would like existing policies protected from the application of new rules. “Historically, there has always been grandfathering, but this requires discussion, which is part of this whole consultation process,” says Mr. Zive. “(We) want to offer broad grandfathering to current policies to avoid disruption in coverage.”
Commissions and product development
In other areas of regulation, there is also a chance Canada could follow the example being set in the United Kingdom and Europe, with respect to commissions and product development. In the UK, regulators have abolished commissions altogether; those purchasing insurance now pay a fee for service. As a result, he says the number of agents in the region has decreased dramatically, from around 150,000 to 50,000 today.
“It doesn’t work well in the mid and lower market,” he says. “You basically end up deserting that market. They become underserviced and, depending upon the environment, if there are banks involved in distribution, they end up taking over that portion.”
As for pricing and how things could change, he points to the somewhat politically-driven, European example where policies are no longer priced differently by gender, regardless of the fact that women still tend to live longer than men.
Addressing issues that are closer to home and more relevant to product concerns in Canada today, the relatively recent move by RBC Insurance to pull out of the universal life business suggests banks will undoubtedly be part of the insurance in the future, but that they could instead be more focused on distribution of simpler products which are not as capital intensive to carry. “They’ll want to bolt onto their model – low advice, high transaction (volume).”
More importantly, however, the move points to a future challenge for all companies. That is, to develop products which transfer more risk to the consumer in an effort to balance shareholder interests and regulatory requirements.
Such moves could come in a variety of ways: guarantees and certain products are already being removed from the market. Although some of these could come back as the interest rate environment improves (universal life products, for example, need 10-year bonds to earn about four per cent – more than double what they’re yielding today – in order to break even), companies could change certain definitions going forward, or remove others altogether, for example.
“We’re simply going to have to become far more accepting of the fact that many of these products will not necessarily have the complete guarantees we’ve become so comfortable with,” says Mr. Zive. “You’re going to see a far greater shifting of risk to consumers with companies designing products that will allow them to make a profit because there’s this incredible dichotomy between the long-term nature of an insurance company (and their contracts), and the short term requirements of the stock market.”
All of which, he adds, is further exacerbated by the regulatory environment, and competition that is concentrated among only a few companies in Canada. “I think they will figure it out, but I think it will be at the expense of the products we are currently used to.”