Insurers fight reinsurers to keep guaranteed premiums alive

If Canadians have come to expect guaranteed premiums for their critical illness insurance, will they continue to get them? Some reinsurers would have the industry think the answer is no. But many insurance companies are fighting for the opposite!

Last year The Insurance Journal reported that reinsurers were putting pressure on the industry to reduce guarantees on critical illness insurance (CI) products. The pressure has increased since Swiss Re, which is said to have the largest CI market share in Canada, recently announced it would no longer sign any new treaties for CI products with guarantees.

The Insurance Journal also learned that RGA has followed Swiss Re’s lead, and will no longer renew, or sign any new treaties for CI products with guarantees. RGA’s market share, however, is small in comparison. David Pelletier, Executive Vice-President of Development at RGA estimates that its market share is less than five percent.

As a result, the general feeling among brokers – and some insurance companies – is that it is just a matter of time before guaranteed level premiums are gone.

Alphonso Franco, a broker who specializes in the sale of CI products, and who recently hosted the World Critical Illness Conference in Vancouver this past January, declared to the packed house of approximately 600: “In my personal opinion, you had better sell those policies now because guaranteed premiums are not going to be around much longer!”

Many others share this sentiment, but their predicted life expectancy of CI premium guarantees might be pessimistically short. Insurance companies are fighting to keep the guarantees the way they are, and none of the reinsurers, including Swiss Re and RGA, have made any moves to enforce changes to current treaties.

Mr. Pelletier, who is also the President of the Canadian Institute of Actuaries, maintains that guarantees were the wrong way to go and was a severe mistake on the part of the reinsurers. Nonetheless, he says it could be two to three years down the road before any changes are made.

“We do not want to hurt the companies,” explains Mr. Pelletier. “Nor do we want to damage the client relationship.” Why do the companies not want to give up the guarantees? “Competition,” he replies. “Guaranteed renewable premiums are a strange idea in Canada. Consumers feel they are better off with guarantees.”

Sustainable guarantees

The reasons for deep-sixing the guarantees are many. Reinsurers such as Swiss Re and RGA argue that claims are too high and with the advances in medical treatments and diagnostic technologies, the detection rate of illnesses could skyrocket.

However, none of the insurance companies The Insurance Journal spoke to had this experience. Just the opposite in fact.

Teresa Walkey, position at Manulife Financial, says that claims are falling well within pricing expectations. It is the same story with Sun Life Financial and RBC Insurance.

“We are not feeling pressure [to change the guarantees] from our reinsurer,” says Ms. Walkey. “We have certainly had a lot of conversations. We, and our reinsurer, are comfortable that we are on solid ground and that our guarantees are sustainable.”

“We are watching [claims] carefully,” says Ms. Walkey. “Every carrier is to see what kind of experience is coming in given the relative newness of this product in Canada. But we have the older block of business in Canada, from Commercial Union.”

Ms. Walkey is confident that Canada can maintain the guarantees because it has the advantage of leaning from the experiences that caused pricing problems in other countries. “For instance, every carrier in Canada has a 90-day cancer moratorium. That was one of the big things that caused financial pressure on the product in other jurisdictions.”

Sun Life, which includes Clarica, is the top insurer in terms of CI sales in Canada, according to Mark Weicker, National Product Manager at Sun Life. In 2002, he says the company sold over 10,000 policies. Although the company is ready if the day comes to change the guarantees in its contract, he states that it is trying to continue with the status quo as long as possible. “Consumers are used to the guarantees,” he adds.

Kathryn Giffen, President of RBC Insurance, says her company has not had any pressure from reinsurers to change its CI either.

Ms. Giffen disagrees with the argument that since other countries do not offer guaranteed level premiums, it is just a matter of time before we lose ours. “I have not seen anything that would suggest in Canada that those [pricing] issues facing us.”

Transamerica Life Canada recently launched its unique medical expense coverage CI product. It is now the only insurer in Canada to not offer guaranteed level premiums on its CI. Yet the decision to go with the renewable premiums was not a result of the pressure from reinsurers, says Gregor Grant, Assistant Vice-President for Traditional Products.

He says the company felt the risks involved were unacceptable, and that the focus was on low premiums and the needs of the clients rather than on guarantees.

Reinsurer support

Internationally Munich Re no longer supports guaranteed level premiums, however it says it is looking for ways to keep its guarantees in place in Canada. Benoît Miclette, Director of Living Benefits, says “guaranteed premiums are making the industry nervous. We are researching ways to keep this guarantee in place, but for now it is still hard to predict if we can.”

Guaranteed premiums are actually encouraged by one reinsurer. ERC says it is fully committed to this market. Eddy Levy, Director, Living Benefits, North American Markets at ERC, says he does not understand why the other reinsurers are having so much trouble with the guaranteed premiums.

“They may have some issues with how they have priced the reinsurance in the past for this kind of business so they may be experiencing some problems with some blocks of business that have guarantees in them,” he suggests.

Mr. Levy maintains that his company, which he says has about 20% of the CI reinsurance market share, has not seen higher than expected claims in Canada. In the U.K., however, ERC and other reinsurers in the CI market are revisiting their pricing and looking for higher profits in the longer-term markets, he adds.

He agrees that new technologies will increase the rate of illness detection, however, he says, “improvements in medical technology may reduce the incidences of some of the covered conditions, so I think there is a positive side to that as well.”

The guarantees may come at a cost, adds Mr. Levy. “I definitely think that pricing for long-term guarantees – T-65, T-75, T-100 – is going to go up. I also thing we are going to see more products with less guarantees, and that is a positive thing. It is an opportunity for the marketplace to be creative and bring the prices down.”