Mortality rates drop, but life premiums remain stable

By Andrew Rickard | October 18 2006 07:59PM

Canadians are living longer than ever, but that doesn’t mean they will see a significant drop in their life insurance premiums any time soon.

New mortality data released by Statistics Canada late last year shows that life expectancy has reached record highs: 79.9 years for boys born in 2003, and 82.4 years for girls. Seniors can count on a longer retirement as well. Men who were aged 65 in 2003 can anticipate living another 17.4 years, while women can expect an additional 20.8 years.

“Yes, mortality rates have been dropping,” says Ashley Crozier, an independent actuary in Toronto. “But much of that has already worked its way into pricing.” Low interest rates, middling investment returns, concerns over terrorism, and the possibility of a flu pandemic could prevent rates from dropping further, but there are also competitive factors to consider. “There is marketing pressure mitigating all of it,” says Mr. Crozier. “If an actuary were to price a product and come up with a rate in a vacuum, it might be correct based on the assumptions, but it could be too low or too high compared to the market. That could be disastrous for the insurance company.”

And some insurers do seem to be having trouble generating decent revenues while keeping up with their rivals. “It’s true that the profitability of term insurance varies from one company to another,” says François Lemieux, an actuary with reinsurer Scor Vie. “It’s a very competitive market, so margins are relatively thin. I’m not sure if all the companies are meeting their targets.”

In fact, less than half of the players in Canada say they are making money on their term offerings. According to the recently released Munich Re 2006 Pricing Survey, only 45% of life insurers report that their term insurance products are priced profitably.

“One of the big issues we’re seeing right now is that the price of term 10 has come down too much, too fast,” says Joe Kordovi, vice-president and pricing actuary at Transamerica Life Canada.

The introduction of preferred underwriting, combined with decreasing reinsurance rates, has helped to drive term insurance prices down over last several years. Much of the attention, however, has been focused on the initial premium. Few insurers have changed their renewal rates, and clients have been facing significant sticker shock on their anniversary dates.

Those who are still insurable have been taking out new coverage rather than renewing existing T-10 policies, and it is beginning to have a negative effect on insurers’ bottom lines. “Because of this poor persistency, I think we’re now going to start seeing a stabilization of prices,” says Mr. Kordovi. He points to the results of the Munich Re survey where only four companies said they planned on further decreases in term insurance pricing, while two said they would increase their rates, five expected to rebalance, and twelve said they would not change.

“Insurers do not have a great deal of experience with T-10 renewals yet,” says Brian Louth, vice-president of development at RGA Reinsurance. “It’s really a question of whether people have priced in enough lapse,” he says. “If the insurers see lapses being higher than expected, they may need to readdress that in the pricing of their new term policies.”

Another solution to this problem has been for both insurers and advisors to move towards longer term products.

“With some of the T-10 products out there, there are what I call ‘heart attack renewals’. If the client was in good health beforehand, when you send him a renewal letter, he might die of a heart attack,” remarks John Dark, an assistant vice-president and product actuary at The Co-Operators in Regina.

“We introduced a T-25 product about four years ago, and we think the longer term resonates with people. Our agents like it because they don’t have to deal with the renewal shock and clients like it for the same reason.” The product’s popularity with the Co-Operators sales force has grown steadily, accounting for a 5% larger share of the company’s term sales in each of the past two years.

Martin Fortier, assistant vice-president, individual pricing with Sun Life Financial, has noticed a similar trend. “I can tell you that at Sun, we’ve seen an increase in our T-20 sales compared to our T-10 sales,” he says, attributing some of the shift to the real estate boom. “I do hear that advisors will recommend T-20 more often for mortgage holders. It allows them to lock in a level premium and match the need with the term-length.”

Mr. Louth says that he has heard some talk of a T-30 product being introduced into the Canadian market, possibly with return of premium features included. “It would make sense. T-10 doesn’t keep people very long,” he says. “But I don’t know of anyone who is developing it just yet.”

Term pricing isn’t the only area where insurers are having difficulties. The situation is even worse in some of their universal life products.

According to the Munich Re survey, only 10% of insurers are reporting that their level cost of insurance universal life products are priced profitably. Insurers were hoping that long-term interest rates would improve, but since those changes haven’t materialized, Mr. Kordovi says he expects a gradual shift away from level UL pricing. “I think companies may start putting more emphasis on YRT (yearly renewable term) rather than level cost of insurance. It’s more balanced in terms of client value and company value. It passes the investment risk on to the client, but it also provides client with more investment opportunities.”

In an environment such as this, it came as something of a surprise when Manulife Financial announced that, effective September 30, it would be lowering the level cost of insurance rates in their InnoVision product for all bands and all ages by as much as 4% in some cases.

Although Manulife’s Canadian division grew segregated fund and mutual fund deposits last year, according to their annual report they saw a decrease in premium income in 2005, down to $5,761 M. compared to $6,011 M. in 2004.

Is this drop in UL rates part of an attempt to buy a bigger share of the Canadian life insurance market? Tom Nunn, the assistant vice-president of Manulife’s media relations department, declined to comment on product pricing and would not allow access to members of the company’s actuarial department.

If long-term interest rates do stay down, it will not be easy for insurers to keep their level cost of insurance (COI) universal life prices where they are today, never mind lowering them. “A round of price increases will become necessary, unless people can find other ways to offset it,” says Mr. Dark of Co-Operators.

“Each company will have its own approach to trying to improve the outlook in their portfolio. Some may use more equities or derivatives in their funding. Others might try to drastically reduce unit costs, perhaps by an acquisition or using some new system that costs less to run and maintain. But the longer rates stay down, the more of a challenge that will be.”

The problem with rate increases is that no company wants to be the one to make the move. “As another pricing actuary said to me, ‘Change is good, John. You first!’”