Insurance in 2012 and beyond

It’s been tough going for insurance companies in the last few years. They’ve not only had to retire certain types of life insurance products and variable annuities, but also witnessed major consolidation.

In my October 2011 article, I discussed how International Financial Regulations Standards (IFRS) will continue pressuring insurers regarding reserve requirements and marking their asset to market value on long-term assets. IFRS may also show an insurance company’s quarterly profits as very high in one quarter, but not in the next.

The ongoing low-interest-rate environment has reached levels not seen in more than 60 years. As a result, prices will continue to rise for guaranteed-level-costof-insurance products, while other products such as Level Cost of Insurance (LCOI)/Term to 100, Critical Illness Insurance and annuities will start to disappear.

We’ve already seen low interest rates affecting the Guaranteed Interest Account (GIA) on Universal Life (UL) policies. This year, we’ll witness more pressures on LCOI ULs, GIA in ULs, and the performance on participating (PAR) pools.

As long-term bonds mature, insurance companies are replacing them with low-yield, long-term bonds. This is impacting the dividend yield on PAR whole life policies.

Back in the late 1980s, PAR pools had a crediting rate of 12%. We are now down to the 6% range for most carriers. Realistically, this downward trend will likely continue for some time.

Sylvain Charbonneau, VP, Marketing and Products, AXA Assurances, told the Insurance Journal, “IFRS rules are likely going to impact [whole life] product design and prices—mid- to long-term—thereby potentially slowing growth.”

This represents quite a challenge. When the 1982 exempt rules came into effect, the market for endowment policies had come to a crashing halt. Insurance advisors were concerned about their livelihoods.

On the upside, market pressure also resulted in new products such as Yearly Renewable Term (YRT) Universal Life, and Level Cost Universal Life.We later saw mutual funds being added to UL policies, and most recently, ETFs.

Some of our other innovations were inspired by our American counterparts, such as convertible critical illness, which allowed for the conversion of a CI policy to long-term-care insurance.

In the U.S., John Hancock offers indexed UL policies, where the excess UL premium participates in the S&P 500 index. There’s a 2% floor and a cap of 13%. This creates a capital guarantee for the client. It also benefits the insurance company with respect to financial reporting and accounting.

Here at home,Canadian insurers are offering Guaranteed Market Indexed Account (GMIA) within its UL platform. The solution is similar to John Hancock’s, except it doesn’t have a ceiling on the return. However, it does guarantee never to have a negative return.

This creates a smooth return over the long run and takes advantage of the equity market, in this case the S&P/TSX 60. Double digit returns are no longer the norm. A long-term return that’s better than a GIC, but lower than that of the index, has a lot of appeal to many investors.

For our industry to continue thriving,we must constantly invent and reinvent insurance products. We must also look at YRT-based contracts to fill the voids as LCOI becomes less obtainable for consumers and less profitable for insurers.

Pierre Ghorbanian, CFP, FLMI, is an Advanced Markets Business Development Manager at BMO Insurance