Policyholders have strong insolvency protection

Clients are probably unaware of the policy benefit protections in place in the case of insurer failure, if a morning session at the Independent Financial Brokers Spring Summit in Toronto is any indication.

There have only been three insurance insolvencies over the last generation in Canada, two of those were the Confederation Life and Sovereign Life failures of the mid-1990s. For the most part, insolvency hasn’t been an issue that’s top of mind for Canadian policyholders — until recently.

“I think we were all surprised when we saw AIG fail,” says Josée Rheault, a vice-president of communications with Assuris, the non-profit organization set up by the insurance industry to protect the guarantees of Canadian policyholders.

Rheault had difficulty presenting as she was swamped by impromptu questions from the audience of advisors eager to know what protections exist for their clients.

In a nutshell, Assuris’ protection of Canadian policyholders is fairly extensive and likely not as well-known as the protections offered by the Canadian Deposit Insurance Corporation for Canada’s banks. Currently 99 life insurance providers are mandated by law to contribute to Assuris. Guarantees on all insurance products — including those held in tax free savings accounts — are protected by Assuris in the case of insolvency.

Rheault explained that in a worst-case-scenario, Canadian policyholders will have 85% coverage for the guarantees of an insurance policy — that’s if their guarantee value exceeds proscribed minimum amounts. As was the case in insolvencies in the past, such as Confederation Life, policyholders will usually get 100% of their value returned to them since it’s Assuris mandate to ensure that a solvent insurer can acquire the policies of a failed competitor and continue coverage.

“If a bank goes insolvent, you’ll get a cheque. For life insurance, if you have a life insurance policy, we can’t say sorry you’re no longer covered,” she says. “There are clients who may have purchased a policy when they are young and healthy and now would have trouble getting coverage. They need to be protected.”

Benefits protected, not products

Assuris has a number of different types of protections in place based on the type of guarantee a client has on their policy.

Protection exists on monthly income guarantees, health expenses, death benefits and cash values and the accumulated values of policies — which include premium deposit accounts and dividend deposits.

As Rheault points out, products like Universal Life have different protections on each of the unique guaranteed benefits the policy may offer.

“Universal Life has three different benefits that need to be protected: a death benefit, a cash value benefit and a savings account,” she says.

For example, in the case of insolvency, a policy holder would have their death benefit guaranteed up to $200,000 or 85% of the death benefits value, whichever is higher. Similarly the cash value of the policy would be guaranteed up to $60,000, or 85%, again, whichever is higher.

Advisors in the audience were particularly interested to know how Assuris protected guaranteed investment products such as segregated funds and guaranteed minimum withdrawal benefit (GMWB) products.

The market downturn has drastically reduced the underlying net asset value of many of these types of products. As a result they have become a financial burden for insurers which are mandated to hold large reserves to fund future guarantees on these products.

Rheault says any resets or guarantees locked in on seg funds before the declaration of insolvency are protected by Assuris. This means investors will have either $60,000 or 85% of their guaranteed balance protected, depending on which is higher.

“If the value of the segregated fund remains the same or is worth more than the guaranteed principal Assuris’ protection is not needed. If the value is lower, we apply the protection on the guaranteed amount,” she says. “If you have a segregated fund that has a 75% [principal guarantee], Assuris protection will apply to 85% of that guarantee.”

GMWBs are a little bit more complicated because there are two phases to the products: an accumulation phase and a payout phase. Assuris provides different protection depending on the stage the policyholder is in.

“If a policyholder is in the savings phase — we define the savings phase as no withdrawals in the last 12 months — it comes under cash value protection. It would be the guaranteed withdrawal value balance that is protected — $60,000 or 85%,” she says. “If they are in the payout phase, regardless of whether it’s a term benefit or a lifetime guarantee, they are going to be protected by our monthly income benefit, which is $2,000 a month or 85%. That total is based on the GMWB balance at the day of insolvency.”

Clients win, advisors in flux

Another hot question was what happens to advisor compensation in the case of insolvency. There is no clear answer. Advisors who were career sales force agents would need to look for new work, but Rheault says in this era of mainly independent insurance advisors, there are no guarantees that the new holder of a policy will be required to honor compensation arrangements.

“An advisor could make a creditor claim against the failed policy issuer,” she says. “The obligation to provide compensation to the agent doesn’t necessarily transfer over.”

It is vital that clients continue to pay their premiums during the liquidation phase of the failed insurer, Rheault says, or they will forfeit their Assuris protection.

“A client’s policy has to be in-force in order to be transferred. The policy is active under the control of a liquidator and the liquidator will be collecting those premiums,” she says. “The liquidator will contact [clients] directly to inform them on how their respective benefits are protected by Assuris.”

Currently Assuris has access to an immediate liquidity fund of $120 million to fund insolvency claims. If necessary, it has the legal authority to collect $4.5 billion from its members if there was a major insurer failure.

(05/27/09)