Universal life investments in freefallBy Alain Thériault | May 12 2009 08:12PM
New premium sales in universal life insurance declined between 2007 and 2008. The recession and stock market volatility are taking their toll on excess deposits.
While the number of policies sold remained stable, new universal life insurance premiums slipped by 3% in 2008 compared with 2007. In the fourth quarter of 2008, new premiums fell by 7% compared with fourth quarter 2007.
The Q4 2008 results accentuated the annual decline, a 2008 report by LIMRA International on individual life insurance sales in Canada concludes.
The insurers contacted by The Insurance Journal said the downturn was related to a decline in excess premiums in their universal life insurance products. They pin this decrease on extreme stock market volatility and the recession in general. Their clients are tightening their purse strings and shying away from poor returns. As a result, they are putting off depositing excess premiums. Protection is now a top priority. Many insured are simply maintaining their policies by paying the minimum premium.
In its 2008 annual rapport, Industrial Alliance bills itself as the second largest seller of universal life policies in Canada, with a 14.4% market share for the first nine months of 2008 (the insurer did not have complete data at the time it published its report).
The insurer says that sales in the family market in individual insurance rose by 7%, while sales to the high income segment plummeted by 41%. It attributes this result to the stock market meltdown. Excess universal life premiums fell from $48.0 million in 2007 to $28.3 million in 2008.
In total, Industrial Alliance's individual life insurance division ended 2008 with sales of $146.9 million, an 8% decrease compared with the previous year.
Specifically, the report explains that "Investors who use their universal life policy as a financial planning tool decided to reduce the amounts they invest in their insurance policy savings account (excess premiums), due to the instability of the markets."
The individual life insurance market is divided between policies with a minimum premium and policies intended for investment. The minimum premium policy generally includes a level life insurance cost for life; its main purpose is insurance coverage. The investment portion of these policies is modest if the insured sticks to the minimum premium. By comparison, the investment oriented policy comes with an annual renewable insurance cost, which is less expensive at first. These policies are commonly used as financial planning tools.
Jacques Potvin Vice President of Marketing, Insurance and Individual Annuities at Industrial Alliance does not see signs of a migration from one type of policy to another. "Insured are deciding instead to defer excess deposits in their existing policy, until they see the situation in financial markets improve."
The deferral of excess premiums may well linger in 2009. At Transamerica Life Canada, Joe Kordovi, Vice President and Pricing Actuary, Life Products, points out that he has observed the trend in the first quarter of 2009.
He says, "In the first quarter, our new UL policyholders are investing 2.5 times their cost of insurance in their contracts. In 2008, the average was three times the insurance cost. Mr. Kordovi is not surprised by these results because they resemble the aftermath of the burst of the tech bubble. Once markets stabilized in 2002-2003, he continues, Transamerica experienced a very fast reversal with increased funding levels.
Mr. Kordovi adds that new UL premiums for Q1 2009 were down 30% from Q1 2008. New policies slipped by only 4% for the same period. "This points to less funding but also fewer large-case ULs being placed. People still need the protection. They are just hesitant or unable to invest currently," he explains.
Saundra Edwards, Assistant Vice President, Life Insurance Marketing for Great-West, Canada Life and London Life, observed a 15% drop in new annualized premiums going into universal life overall. Great-West and Canada Life are more affected, but the same trend is going on at London Life, even if this company is more committed to whole life participating insurance, she points out.
Like its competitors, the Great-West group confirms that clients are postponing excess deposits. Ms. Edwards adds that there is no decrease in the number of policies.
She also points to another trend: a shift form universal life to par insurance.
Paul Smith, Vice President of Insurance Marketing and Product Development, at Manulife Financial also saw excess premiums wane in Q1 2009. Yet Manulife has bucked the trend in early 2008: new universal life premiums were up 9% from 2007.
Mr. Smith says that universal life insured are steering clear of stock market investments. They pay the minimum premium, and the excess goes to daily interest or guaranteed options. "Policy holders are even avoiding the fund of funds option," he adds.
He points to the enthusiasm for universal policies with paid-up premiums after a number of years guaranteed in the contract. "There was a 20% to 30% increase in annual new premiums steered toward these products in the first four months of 2009 compared with 2008," Mr. Smith says.
At Sun Life Financial, Greg Grant, Assistant Vice President, Life Insurance Product Development and Marketing, also observes a decline in excess premiums, a situation he considers temporary. He stresses that there are two investment approaches: one favoured by new policy holders and the other popular among people that bought their policy before the volatility began.
"Existing clients follow the investment strategy defined initially with the advisor. We are not seeing large movements in universal life investments. In contrast, new clients are more conservative and are looking for policies with more guarantees," Mr. Grant says.
Gerry Anthony, Senior Consultant, Insurance Product Development of Standard Life Canada, says that 25% of the deposits are going toward the guaranteed interest option. "It is roughly the same proportion as seven years ago, after the tech bubble burst," he says.
The only difference is that much more money is deposited in the accounts managed, he continues. Forty per cent of deposits end up in these options, while 22% are being channelled into index options and the rest are going into asset allocation and funds of funds portfolios.
Standard Life has been guiding universal life clients toward the investment component for the last two years, by showcasing its product with an insurance cost at an annual renewable rate, Mr. Anthony explains. "In 2007, minimum premium policies represented 47% of universal life business at Standard Life. Today, it represents only 38%," he adds.
Stock options are also a strong selling point for universal life at Transamerica. "In Q1 2009, one-third of our clients chose to invest in our imaxx TOPs portfolios, based on third party mutual funds. One third was divided between index options and active management. The remaining third were conservative, and opted for guaranteed interest options or options related to treasury bills," Mr. Kordovi says.
Managing general agents
Managing general agencies (MGAs) are also seeing excess premiums slip. At Quebec-based Groupe Cloutier, level cost policies usually predominate. But in the current economic context, Patrick Cloutier, Vice president, Sales and Business Development, notes that universal life is selling much more for its protection potential than as an investment. "If a client deposits an excess premium, it is mainly to pay up the policy more quickly," he says.
Mr. Cloutier adds that clients are choosing more conservative investment options. "Most of our clients buy universal life to pay up the premiums. For this type of usage, we recommend a policy with a 100% guaranteed pay-up period, cost of insurance, bonuses, minimum return, etc. For example, a company that guarantees a minimum level of returns in an investment option."
At the time of the interview with Mr. Cloutier in late April, the Groupe Cloutier had sold 85% of its universal life at level cost. The MGAs clients are buying a growing number of policies with the paid up premium option after 10, 15 or 20 years.
National accounts affected
In its 2008 annual report, Industrial Alliance confirms a 49% plunge in individual insurance sales within its national accounts network (network of securities brokerage firms). It attributes this drop to the fact that most of the policies in this distribution segment include a high proportion of investments.
At Sun Life, Mr. Grant notes a downturn in sales of new UL premiums at national accounts because the number of large policies has decreased. The situation results from volatility, he says.
"The national accounts channel has historically been known for generating large UL cases and given the state of equity markets, these sales have slowed considerably," he explains.
Mr. Anthony of Standard Life echoes this view. He adds that national accounts normally sell more level cost insurance, which is not the insurer's target product. That is why the decline seen in this network is not surprising. It has been this way for years, he says.
Transamerica had no comment on national accounts, while Manulife referred The Insurance Journal to the research firm Newlink Group, which frequently publishes reports on distribution networks, including national accounts.
Newlink president Byren Innes says that the figures in the upcoming report on national accounts cannot be publicized for another month. All the same, he foresees a steep plunge in UL premiums for this network. "Sales are actually up for three national accounts but down 30% for the others. You will understand that I can't disclose their names yet."
He expects the average number of policies sold to remain steady for national accounts overall, although he anticipates a gradual transition toward more traditional policies such as whole life, par or non par.