Topping up

(February 2007) If 2006 was the year of the CEO with their fat compensation packages — and let’s face it, what year isn’t — 2007 might be the year of insurance top-ups. Insurers see disability insurance and specialty products like income replacement as offering best opportunities for growth this year.

The demand for specialized products applies to both high-net-worth and high-income individuals, says John Young, president and chief executive officer of RBC Life Insurance, a unit of RBC Insurance. The reason for the expected increase in demand is fairly straightforward: As HNW incomes soar, the proportion of that income they are able to insure drops off.

“The amounts that [high income earners] can buy of income replacement insurance in the regular market are relatively limited,” says Ken Hunter, partner at Toronto-based Hunter McCorquodale Inc. “The more you make, the lower the proportion of your income you are actually able to replace,” he says.

RBC calls this situation ‘reverse discrimination.’ A typical employee group plan provides a standard income replacement ratio, which is often 66.67% of the employee’s salary, says Young, which get impacted further when benefits are added to the mix.

Employers seeking top talent could also help increase demand for this type of product. “No one wants to be the firm that doesn’t have the leading-edge benefits that provide the maximum amount to their partners,” says Neil Paton, vice-president of insurance sales development, at RBC Life Insurance.

As with other products, different companies provide different product designs, requiring the advisor to look to individual client needs as well as the bottom line.

PPI Financial Group, for example, provides its Guaranteed Standard Issue product on a universal life insurance platform, says Scott Beckett, vice-president of living benefits for the Toronto-based managing general agency. As well as disability insurance, the product can be adjusted to include or exclude critical illness insurance and long-term care insurance or a combination of all three products.

Also, as with other products, some of the underwriting principles vary. In its integrated benefit solutions concept, RBC requires a minimum of 10 executives working with the same company in order to make the plan worthwhile. PPI has a similar requirement, although the individuals don’t necessarily have work for the same company, only that they have a well-defined business relationship. Hunter McCorquodale has no minimum number.

The differences come from the underwriting arrangements struck by each firm. Hunter McCorquodale, for instance, deals only in various types of special risks issues only Lloyd’s of London policies.

To offset the indirect consequences of disability in the workplace, insurers and MGAs also offer a variety of products. Some are designed to cover overhead expenses when the owner becomes disabled. Then there is buy-sell disability insurance and key person disability insurance.

But these products have several drawbacks. In some cases, they may require adjustments to the company’s basic group benefits package. In others, commission rates for advisors tend to be lower than conventional sales and the specialized nature of these products makes it unlikely that an advisor could build a complete practice in this area.

Still, that hasn’t stopped firms from jockeying for position. But in order to take the lead some companies need more brokers. Hunter McCorquodale wants to hear from advisors active in the disability market, especially with high-dollar clients. RBC has room in its distribution network for several types of advisors, especially group benefits practitioners dealing closely with senior benefits professionals in organizations having sufficient high-income employees to make a tailored arrangement feasible.

This article originally appeared in Advisor’s Edge Report. Al Emid is a Toronto-based financial services journalist.

(02/01/07)