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Shake up continues in guaranteed withdrawal benefits market

By Donna Glasgow | May 22 2012 05:24PM

Advisors are finding they have fewer and fewer options for their clients when it comes to guaranteed withdrawal benefits products.Economic and regulatory pressures have forced two more players out of this market – at least temporarily. Desjardins Financial Security announced suspended sales of its guaranteed lifetime withdrawal benefit option on its Helios segregated fund contracts effective April 27 and Sun Life Financial and CI Investments announced the suspension of new sales through independent advisors of their SunWise Essentials Series segregated funds, including the GLWB product, as of May 11. These contracts can still be sold through the company’s career advisors.

Sun Life also increased insurance and guaranteed maturity withdrawal fees for the SunWise Elite and SunWise Elite Plus funds, which were closed to new investors in October 2010.

These developments follow Transamerica Life Canada’s decision announced in January to leave the guaranteed withdrawal benefits market and Standard Life Canada’s decision to suspend new sales of its GLWB product, which it announced on April 11.

Significant challenges

In its announcement made to distributors on April 20, Desjardins Financial Security said that the combination of escalating economic and regulatory pressures have created “significant challenges” for companies that offer guaranteed income products, such as its Helios GLWB. The insurer’s Helios segregated fund contract core guarantees, 75/75 and 75/100i, are not affected by this suspension.

In an interview with The Insurance and Investment Journal, Alain Bédard, senior vice president of individual insurance and savings at DFS, said the suspension was necessary because the current level of pricing was unsustainable due to a combination of factors. “We reviewed our overall portfolio of seg funds and clearly with the low interest rate environment, the volatility in the stock market and the stricter regulatory capital requirements…we cannot sustain the level of pricing that we have on that option, so we decided to remove it from the market.”

For existing GLWB contracts, the company has also introduced a $25,000 annual limit on additional deposits, he added.

DFS is currently reworking its GLWB option on the Helios contracts in light of the changing market conditions. A question and answer document prepared by DFS for advisors states, “It’s too soon to tell whether future economic and regulatory realities will make it possible to reinstate the GLWB in its current form. That said, DFS is looking into changes it could make to its products so it can continue to meet the needs of clients who want to protect their retirement income while ensuring healthy business growth in a changing environment.”

The Q&A document underlined that the GLWB suspension is “not an indication of weakness, but rather an appropriate reaction” to major changes in the financial and regulatory environments. The document adds, “Desjardins Financial Security remains a company with excellent capitalization. Despite upheavals in the global financial markets, it continues to exceed regulators’ expectations in this regard.”

Commenting on the changes that the GLWB market has undergone in recent months, Mr. Bédard says he expects insurers to introduce a new wave of products that are less capital intensive and that minimize the impact of stock market volatility. He anticipates that these new products will be priced to better reflect the current market conditions.

At Sun Life, Paul Fryer, vice president, individual business management observed that interest rates are down over one per cent compared to this time last year, which has had an impact on profit margins for a number of products. In addition, regulatory capital requirements have become too demanding for guaranteed withdrawal benefits products, even for an insurer like Sun Life that hedges 100% of its seg fund risk, he said. “The capital rules don’t provide credit for hedging.”

Mr. Fryer said that the role of Canada’s insurance regulator, The Office of the Superintendent of Financial Institutions Canada (OSFI), is to make sure that it is setting the rules at a level prudent enough to maintain insurers’ financial strength and he adds that capital rules in other jurisdictions around the world are also continuing to become more stringent.

Difficult decision

The company’s decision to impose the suspension was difficult. “We did not take it lightly.” The insurer decided to allow its career sales force to continue to sell it, since unlike independent advisors, they only have Sun Life’s product on their shelves. “It is an important product for their business,” he added.

Sun Life and CI intend to launch a modified segregated funds program later this year. “We’re working on it as quickly as we can. There are a number of steps, from design and pricing to regulatory approval.”

Michel Fortin, vice-president, business opportunities and pricing, retail and pension products of Standard Life also pointed to capital requirements as a major factor behind its decision to suspend sales of its guaranteed lifetime withdrawal benefit product as of April 16. The insurer only introduced its GLWB product one year ago.

The company was a late entrant into this market because it wanted to make sure it had a hedging program in place, explained Mr. Fortin, adding, “Why we are suspending the product now is that conditions have changed. As you know, interest rates are at historical low levels, but that would not be the main reason. The main reason is that capital requirements from our regulators changed a lot, so much that the product is not sustainable in the long-term.”

OSFI increased capital requirements effective Jan. 1, 2011, however, during the year some insurers were in discussions with regulators to see if there was a way to recognize the dynamic hedging efforts made by insurers when determining capital requirements. Earlier this year, insurers learned that hedging would not be recognized, at least not in the near future, he said.

Hedging not recognized

Mr. Fortin underlines that Standard Life respects OSFI and he does not want his comments to be viewed as critical. “We are just expressing an opinion that it is difficult these days to put that kind of capital requirements aside without recognizing some of the good stuff companies are doing to manage risk properly.”

The heavier capital requirements particularly impact GLWBs because the guarantee on these products is for life as opposed to perhaps a 10 or 15 year guarantee for seg funds, he adds.

Because of the GLWB suspension, Mr. Fortin says the company recognizes that it is missing a payout solution for its Signature Series segregated fund product line. He added that the company is looking at alternatives, but he is not yet able to say when such a solution might be launched.

He emphasizes that Standard Life believes in its seg fund products and wants to grow this business. “There is no intention to abandon our seg fund line up. We just want to make sure…that what we offer in our product makes sense for the advisor, the client and Standard Life.”

Asked about his company’s plans for its GWB product, Marc Saint-Jacques, director, savings and retirement products at Industrial Alliance, said, “First of all, I would like to make sure that people know that IA is committed to continuing to meet the needs of a growing number of Canadians who are looking for retirement solutions and the flexibility to manage their savings with lower risk and volatility. It’s with this in mind that we just decided on April 2, to continue to offer our GMWB series with a reduced fund line-up.”

The fund offering for IA’s GWB

series has been reduced from 49 funds to five income funds. “We are convinced that the guarantees offered in this product still answer the client’s need. At this point, it is too soon to be able to say what will be the future of our product.”

Julie Yoshikuni, vice-president, retail investment products and marketing at Empire Life says at this time the only change that the company is looking at for its GWB is an enhancement. The insurer is considering a tiered income payout feature. The payout would be based on age ranges.

But, no negative changes are planned at present, she added, “Today, our view is that we are comfortable with our GWB as it stands.” A few factors differentiate Empire Life from some of its competitors in this market, she adds. One factor is that Empire’s ratio of segregated fund assets to GWB assets is relatively low. Another factor is that its underlying funds in its GWB are managed in-house. This is more cost effective and facilitates risk management, she says.

Ms. Yoshikuni underlines, however, that Empire faces the same pressures as other insurers and if conditions change “we will take the necessary steps to manage our GWB accordingly.”

She adds that the need for retirement income products is growing. “The GWB market is a $30 billion industry. The focus and need for income products is only going to escalate in the future, given the aging demographics. Manufacturers will find ways to evolve the GWB of today to meet the growing need for income. The pace of future product development will be a partial reflection of the degree of future regulatory change.”

Commenting on the future of the GWB market, Mr. Saint-Jacques of Industrial Alliance said the recent changes seen in the industry indicate that some insurers are not comfortable with this product in its present form. “Given the low interest rates, the volatility of the equity market, the new regulatory capital requirements and the fact that hedging strategies are not considered in the capital requirements, companies will want to continue to make sure they are comfortable with their products and this may mean a lot of things. This being said, IA wants to continue to be the partner on which clients can count to plan their retirement and this can be done with a lot of products, not only GMWBs.”

SSQ Financial Group was evaluating its GWB offering at press time in early May. “We are analyzing this issue as we deal with the same market conditions as our competitors. We do not yet know when we will make a decision, but all scenarios are on the table,” Marie Lamontagne, the insurer’s senior vice-president, corporate communications and marketing, told The Insurance and Investment Journal.

Contacted about their plans for their GWB products, Manulife Financial did not reply to an interview request, although it has recently announced that it will lower payouts for its IncomePlus product from 5% to 4%. Great West Life declined to be interviewed on this subject, although its subsidiary insurer, Canada Life recently announced increased fees for its lifetime income benefit option (For MGA reaction, see page 22).

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