Industry still faces challenges as it deals with financial crisis fallout

A panel of insurance executives say they are pleased with the way the industry has weathered the recent financial storm, but warn that there are other challenges still ahead.

At The Insurance and Investments Convention in Montreal on Nov. 13, Serge Therrien, Publisher of The Insurance Journal, hosted an industry panel to discuss both current events and potential difficulties in the months to come. Alain Brunet, President of National Bank Life Insurance, Les Herr, President and CEO of Empire Life, and Kevin Strain, Senior Vice President of individual insurance and investments at Sun Life Financial, shared their thoughts about trends in the financial services industry.

Mr. Therrien started the discussion by asking the panellists for their thoughts on the financial crisis that began more than a year ago. "You have a lot of resources - actuaries, financial specialists, investment specialists," he said. "How is it that no one saw this problem coming?"

Mr. Strain replied that the industry did indeed see the crisis coming, in the sense that it was already aware of falling interest rates and the potential for a drop in the equity markets. He noted that his own company was managing its risk exposure with a complex hedging strategy. What they weren't prepared for was the depth of the crisis and the way it significantly increased the cost of these hedges.

This was echoed by Mr. Herr. "It's pretty difficult to predict the failure of the entire financial system," he said. While domestic regulations meant that Canadian financial institutions remained soundly capitalized, the same cannot be said for other countries whose highly leveraged financial institutions dragged the world economy down with them when the credit bubble collapsed. "We were operating with the expectation of normal risk," he said. "You don't expect system-wide failure," he noted.

For his part, Mr. Brunet reminded the audience that the Canadian Institute of Actuaries, among others, had grappled with the problem of capital reserves more than a decade ago. As a result, the Canadian system emerged intact. Financial institutions experienced difficulties, "but there were no bankruptcies, there were no insurers in which you could not still have confidence."

Problems fixed?

When Mr. Therrien asked if insurers had finished making adjustments to their products now that the worst of the crisis seems to be over, Mr. Brunet replied that it would be presumptuous to say that insurance products are completely in the clear. "We have a growing need for wealth management and consumers continue to want guarantees," he noted. As a result, insurers may need to adjust capital reserves and costs.

Mr. Herr pointed to recent discussions at the G20 meeting and comments from Julie Dickson, Superintendent of Financial Institutions, which suggest that regulators believe there is a need to make the system more secure. He said that he was concerned that, in the wake of the crisis, there might be an overreaction to risk, and that companies might decide to stop offering the types of seg fund products and features they had in the past, or do so at a prohibitively high cost. "I would hate to see the industry back away and make wealth products unattractive," he said.

Mr. Strain noted that in the United States insurers are still working on fine-tuning their guaranteed minimum withdrawal benefits (GMWB) products, and that this "de-risking and repricing" could come to Canada eventually. The question of hedging remains to be settled as well. "As the volumes grow, understanding the inherent risk in hedging processes is going to be increasingly important," he said. "There are still things to learn, and I think there is still a lot of pressure on the product."

Bancassurance

Mr. Therrien raised the possibility of banks being permitted to sell life insurance in their retail branches. "I'd just wish them good luck," replied Mr. Herr, who pointed out that most consumers go to the branch to do everyday transactions, and take out loans and mortgages. Unless prompted to do so by an advisor, most people consider their own mortality and the risk it poses to their family. "Most people don't line up to have that discussion; they want to avoid that discussion," said Mr. Herr.

Mr. Strain pointed out that banks are already in the life insurance business, in the sense that they all own insurance subsidiaries, and already sell creditors group coverage. "But we want to make sure there is a level playing field," he said. Mr. Strain also noted that banks can be partners as well as competitors. On Nov. 12, the day before The Insurance and Investments Convention, Sun Life signed a deal with National Bank that allows members of its career sales force to refer clients to the bank for RRSP loans and mortgages.

Mr. Brunet pointed out that banking institutions are already able to offer a number of travel creditors group insurance products and that in the province of Quebec, Desjardins Group is permitted to sell individual life in its retail branches. He argued that banks should be allowed into the insurance business on the grounds that they can help to serve the mass market. "But I work for a bank, so I should declare my conflict of interest," said Mr. Brunet.

Mr. Brunet noted that about 40% of consumers in Quebec haven't been solicited to buy life insurance because they are of more modest financial means, making them less attractive prospects for traditional insurance advisors. In his opinion, there is room for a variety of players in the market. "I think we can find a way to work together," he concluded.

Standardized applications

While FundServ serves as the single, centralized clearing house for investment fund transactions, there is no such thing for life insurance. Mr. Therrien noted that managing general agencies (MGAs) and advisors alike have often complained about having to deal with a plethora of forms and he asked panel participants if there would ever be a "LifeServ."

Mr. Brunet noted that an attempt had been made some years ago when Life Company Central was formed (in 2002) but they were not able to find a solution that suited every insurer. This was due not only to differences in application processes, but also to disparate technological platforms. "We decided to stop because we realized that we couldn't find a way to do it the way FundServ did for mutual funds."

For his part, Mr. Strain noted that insurers have been taking steps to make better use of technology, and offering standardized data feeds to allow distributors easier access to information. However, he did not think that insurers would share one standardized form because it is a strategic advantage for each company to have its own application. "We may have a different view on risk, we may have different reinsurers that we work with, we may have a different underwriting guide," he explained. "So I don't think that is in the cards."

Mr. Herr agreed with Mr. Strain on this point. "I really don't see it happening," he said. He noted that investment directions can be standardized because, once the client has made their choice, it is really just a matter of placing an order ticket. Insurance applications, on the other hand, vary greatly from company to company since each insurer has different underwriting standards and ways of evaluating risk.

That said, Mr. Herr does believe that each insurer can and should work to simplify their own application processes, but he suggested that some MGAs are wasting money by trying to streamline paperwork. "MGAs spend way too much time worrying about their back-office administration," he concluded. "They need to focus more on helping advisors be better at their businesses."

Untapped market

Mr. Therrien noted that a large segment of Canadian society remains underserved and underinsured. "The market is not saturated," he said, and asked the panellists what can do to reach a broader share of the population. "What's required is to offer products that are a little less expensive, and a little simpler to the mass market," commented Mr. Brunet.

For his part, Mr. Strain noted that Sun Life had recently launched advisormatch.ca, a web site meant to have consumers enter their personal information and use their profile to connect them with a suitable advisor. When Mr. Therrien asked if the site was actually generating sales, Mr. Strain replied that it was early days, but noted that the site had received 2,500 hits in the first week.

Mr. Herr said portal technology was quite interesting, and that there was a need to find new ways to connect consumers to the advisors. But in his opinion, the best way to deal with a large, underserved market is to recruit new people into the business.

Dangers

Mr. Therrien wrapped up the session by asking about the biggest danger advisors face in the year to come. Mr. Strain said that, in his opinion, it would be dealing with the fallout from the crisis. "Advisors who weren't talking their customers over the past twelve months are going to find that they are in a very bad position with those clients," he said.

Mr. Herr also believes that the financial crash is going to separate the wheat from the chaff in the financial services business. He thinks the advisors who are in danger are the ones who focus more on rates of return rather than comprehensive financial planning. "This is not a transactional business, it's a financial planning business," he concluded. "Those advisors who don't want to keep up with the profession, who don't want to plan, they're finished."

"The danger isn't the banks," said Mr. Brunet. "The danger for advisors is to have another year as difficult as the last one." He noted that advisors had to work harder last year, partly because of the types of products they sold. Advisors should talk to their clients about ways to manage risk, and the different kinds of solutions that are available. "Products are changing. People are aging, and people are interested in guarantees."