Group insurance braces for crisis fallout

By Alain Thériault | November 27 2008 01:47PM

Insurers say they can’t yet predict how hard the crisis will hit their group insurance business, but players with a strong presence in Ontario expect to feel the brunt of the manufacturing sector’s woes. Existing business should remain intact, but sales are expected to drag in some niches while disability claims will probably rise.

The Canadian Auto Workers union (CAW) confirmed that North American auto sales are at their lowest level since 1991, stated its president, Ken Lewenza, in a press release dated Nov. 3. He pointed out that Canada exports 90% of the vehicles it assembles and two thirds of the car parts it manufactures to the United States.

A bastion of automobile production, Ontario is already being rocked by this slump. Thousands have been laid off, and a similar fate awaits thousands more. General Motors (GM) plans to close its truck plant in Oshawa in the fall, leading to 2600 layoffs. In addition, the GM head office in Detroit fears that the company coffers will be empty before the end of Q1 2009. On a smaller scale, suppliers everywhere are affected, including in Canada.
Insurers are well aware that these job losses will hollow out their group insurance business sooner rather than later as many consider this sector tied to economic cycles.

"Crisis impact? It's hard to tell. In some sectors, automobile particularly, there will be job losses. We expect group business to be affected," says Marilee Mark, vice-president marketing, group benefits, at Manulife Financial.

Reeling from the shock of layoffs and slumping business, "we may see more employers hesitant to make changes to their group plans or adding new guarantees or benefits, until they see where the economy is going, in the large case market in particular," Ms. Mark explains.
André Simard, vice-president sales, group and business insurance for Canada at Desjardins Financial Security (DFS) wonders where the market will be three months from now. He admits that it is not business as usual.

During the three years that he has overseen sales across Canada, he has never seen the market outside Quebec as aggressive as it is today. Mr. Simard says it has recently become very difficult to land a new group. "Employers are coming to market less often. It is also tough to replace an insurer because the insurer will try that much harder to adapt to the competition." 

All the same, an insurer must be opportunistic in this market, he continues. "The current crisis is not having much of an impact on existing groups because employers have other things to do besides going to market. But new business is slumping. I've been in group insurance for 25 years. I saw the tech bubble burst, September 11, 2001 and the devaluation of the Canadian dollar, and I can tell you that conditions right now are exceptional." 

Mr. Simard adds that the crisis will affect mainly disability claims as mental health problems escalate in the coming months. He says that workers in Eastern Canada, where the economy is powered mainly by the manufacturing sector, are afraid of losing their jobs. This triggers anxiety, depression and a rise in the use of drugs to treat mental problems.

Mounting disability claims coupled with a declining return on insurers' investments could drain reserves used to pay disability claims, he adds.

Alberta is facing the opposite situation. "This province is creating jobs and employers want to seek out and retain employees. They've got money and are not hesitating to add options to their plans. We're seeing more group critical illness options in Alberta than anywhere else," Mr. Simard points out.

Jean Guay, senior vice-president, group insurance, at Standard Life Canada, is downplaying the effects of the crisis. "We're not seeing as dramatic effects in group insurance as in product lines such as savings," he says.
All the same, he agrees that insured will consume more paramedical services and drugs, and that the incidence and duration of disabilities will increase within plans. These factors will drive premiums upward and will offset the decrease in total premiums, he says.

During the current economic climate, insurers that hide their heads in the sand risk seeing their profitability nosedive. "We have to continue to serve the clients well and listen to their specific needs as their premiums climb, fuelled by the rise in disability claims, among other things," he says. 

Ken Fraser, president of the Fraser Group, which produces several research reports on the group insurance industry each year, says that insurers must explore new growth avenues.

He gives the example of the group critical illness option. "Despite low sales, 11 insurers are currently offering a group CI benefit and four players are planning to introduce one this year." They feel pressure from the market, he explains. "Advisors ask for the product and people are window shopping," he adds.

Mr. Fraser explains that insurers are highlighting disability and back to work management tools.
There is also room for growth in existing plans, Mr. Fraser points out, particularly in Alberta where employers are eager to flesh out their plans. For example, they are adding options such as dental coverage or long-term disability.

Manulife says SMEs represent a legitimate growth avenue for group. "We see more first time small business sales," Ms. Mark says.

Can small businesses, many of which are suppliers of the giant manufacturers, find shelter from the storm? "SMEs might see some slowing in traditional businesses and difficulties with cash flow. But small employers can be pretty resilient. In the short term, the growth in that sector (small business) won't be at the same rate it's been in the past," Ms. Mark explains.

Ms. Mark declined to reveal figures, but says she is still seeing good sales in group in the small business sector and sustained growth throughout Canada.

Sun Life Financial, whose group insurance portfolio is heavily weighted in large companies, is currently cultivating the group sector for small and mid-sized businesses. Josée Dixon, regional vice-president, business development, group benefits, insists that this strategy is unrelated to the current economic environment.

Ms. Dixon sees solid potential in Quebec, a province where small businesses abound. "Many of them don't have group insurance. Developing this market will let us surpass the average growth that we usually experience in Quebec of 4.7%."

Senior vice-president, group insurance at SSQ Financial Group, Joanne Goulet, views Ontario and Western Canada as prime growth avenues. "We should end the year with two-thirds of our new group insurance sales from our Toronto office," she confirms. At the time of the interview in late October, SSQ Life had generated $120 million in new group insurance business sales in 2008.

Carl Laflamme, vice-president, sales and marketing, national development at SSQ, adds that the insurer expects to double its sales outside Quebec between 2007 and 2008. The main growth engine for the company outside of Quebec is the small and midsize business market. "We're very strong outside Quebec in the niche of companies with 500 employees and under," he points out.
Ms. Mark of Manulife says that employers hope to reduce costs by soliciting employees' voluntary contributions within more flexible plans. "It will be more of a defined contribution approach. Voluntary and optional products will be another area of growth, like optional life or CI," she explains.

Subcontracting of administrative services also offers good growth potential, Ms. Mark continues. "If they're lean, medium to large size businesses would look to outsource those functions to insurers who are well positioned with their technology to do that." 

Flexible plans are expect to become more prominent in the coming months, Mr. Guay of Standard Life says. "[Insurers] are reaching out more and more to midsized companies. Before, these plans were mostly seen at very large companies."

Many insurers also anticipate greater penetration of health management accounts, which allow employers to give their employees credits for certain types of care.

Mr. Guay says that clients tend to shop around more during a crisis as they seek the most savings, yet he doesn't foresee a massive exodus because he thinks the most "serious" clients will try to negotiate costs rather than change plans.