Universal life: level cost still rising

By Alain Thériault | May 19, 2011, 2:01 p.m.

Universal Life

By now, nearly all insurers have hiked their level cost universal life insurance since early 2011. Interest rate and lapse assumptions, future accounting standards and more stringent regulation are driving the trend.

Manulife Financial started the ball rolling in December, and the market followed (see The Insurance and Investment Journal, February 2011) and the trend has continued. Many insurers recently notified their advisors of increases in their newsletter. RBC Insurance offered its old rates until early May. Transamerica Life Canada and Desjardins Financial Security (DFS) maintained them until late April. Equitable Life raised their rates on March 14.

The main culprit: interest rates. “We’ve all been operating in a low interest rates environment for years now, and the rate increase you’ve seen is really just a rationalization,” says Natalia Witkowsky, director of product development, mass affluent markets at RBC Insurance

The industry had expected higher interest rates, but economic forecasts were pessimistic about this early in the year, she adds.

The increases are targeted. “They mainly affect insured under age 50,” Alain Bédard, senior vice-president, individual insurance and savings at DFS points out. The insurer hiked prices by about 5% to 7% for permanent universal life policies for this segment. Mr. Bédard thinks that the upward trend may linger for another three years if interest rates remain low.

RBC zeroed in on clients under age 40, especially for insurance amounts of about $100,000. The insurer’s April newsletter states that level cost will remain competitive for insured ages 50 and over who buy coverage of between $500,000 and $10 million. “You want to take your spot where you want to be competitive,” Ms. Witkowsky says.

At Transamerica, this age bracket is also seeing steeper level cost increases. Clients ages 25 to 49 that buy $100,000 in insurance are facing increases of 11% to 16%.

Too much of a good thing?

Few players have preserved their original rates in level cost UL. BMO Insurance already reset its pricing some time ago, which is why it hasn’t recently adjusted its rates upwards.

“The objective is to retain its number one ranking for Life Provider sales and be competitive for Life Dimensions sales,” says Stephen Carter, senior vice president, marketing at BMO.

The insurer claims it is comfortable with its current level cost. BMO is also keeping its guaranteed rate on fixed income investment options at 3%. It is preparing a new option that will combine security and market exposure. BMO is leaving the door open. “After all our competitors have completed revisions next month (May) we will review our position to see whether we need to make any adjustments, Mr. Carter says.

As advisors flocked to products with unchanged rates, BMO took advantage of a rise in level cost UL insurance proposals, Mr. Carter confirms. If the stampede generated some new business, most sales went to existing clients who converted their term products into level cost universal life.

Assumption Life is nearly overwhelmed. “Our sales of level cost UL spiked suddenly and we are now considering increasing level cost,” says Carl Victor, manager, financial services development.

The frontrunners also report being swept up in a wave. “We’ve seen a significant increase in applications up until the point of reprice Manulife Financial started the ball rolling in December, and the market followed (see The Insurance and Investment Journal, February 2011) and the trend has continued. Many insurers recently notified their advisors of increases in their newsletter. RBC Insurance offered its old rates until early May. Transamerica Life Canada and Desjardins Financial Security (DFS) maintained them until late April. Equitable Life raised their rates on March 14.

The industry had expected higher interest rates, but economic forecasts were pessimistic about this early in the year, she adds.

At Transamerica, this age bracket is also seeing steeper level cost increases. Clients ages 25 to 49 that buy $100,000 in insurance are facing increases of 11% to 16%.

Too much of a good thing?

Few players have preserved their original rates in level cost UL. BMO Insurance already reset its pricing some time ago, which is why it hasn’t recently adjusted its rates upwards.

“The objective is to retain its number one ranking for Life Provider sales and be competitive for Life Dimensions sales,” says Stephen Carter, senior vice president, marketing at BMO.

Assumption Life is nearly overwhelmed. “Our sales of level cost UL spiked suddenly and we are now considering increasing level cost,” says Carl Victor, manager, financial services development.

The frontrunners also report being swept up in a wave. “We’ve seen a significant increase in applications up until the point of reprice [on January 29]. We also see very strong sales in health and our new par products,” Paul Fryer, vice-president, individual insurance at Sun Life Financial points out.

Canada Life was deluged with requests to convert term insurance into universal life. The insurer sent a notice in March to explain the delays caused by a surge in activity. It assured its advisors that all policies would be converted by mid-April.

Joe Kordovi, vice-president and pricing actuary, life products at Transamerica likened this phenomenon to a fire sale. “All the advisors are rushing to submit their cases before the deadline, which led to a slew of conversions,” he says.

Pierre Morais, life insurance director at BBA Financial Group, confirms that the boom is due to advisors stampeding to convert rather than new sales. “Advisors told their clients: ‘it’s time to convert before the prices go up.’ After the frontrunners acted, advisors rushed to Transamerica, Empire Life and Industrial Alliance. But they all raised their rates in unison. Among our suppliers, only BMO Insurance kept rates steady,” he says.

Shock wave

Most insurers saw the increase in level cost universal life as an opportunity to raise T100 term insurance. Pricing of T100 products is affected by the same factors as those that influence the direction of level cost.

Manulife upped the price of its Family Term and Business term lifetime coverage. The new rates took effect April 22. At the same time, it discarded the Signet T100 product. RBC Insurance’s T100 is also more expensive.

“Anything with long duration guaranteed level premiums is highly sensitive to long term interest rates,” says Steven Parker, assistant vice-president, product marketing, life individual insurance and living benefits, Canada at Manulife Financial.

Empire Life raised its universal level costs rates on April 29. The same day, the company curtailed sales of its Solution 100 – Term product. It still offers Solution 100 With Values. In its newsletter for advisors, Empire attributed its decision partly to the policy lapse rate.

“Lapse rates also affect pricing for T100 and level COI, and it has a much bigger impact at older ages. Lapse rates are 0 for older policies but it wasn’t priced at zero. Twenty years ago, lapse assumptions were less than 2%,” Peter Wouters, director, tax and estate planning and director of retail risk product marketing at Empire Life, explains.

As Manulife did, Empire Life decided to drop its T100 without values instead of raising its prices. “Now, very few companies offer a T100 with no values at all. It was worth the difference 20 years ago but it isn’t worth it anymore. When we look at the very low interest rates we have right now, there isn’t enough of a discount available to give an individual a better rate on straight Term 100 and not giving them any equity in the contract. We think the consumer is better off if he can build equity inside his policy, and then has the option to take this equity if he wants to reduce his coverage or needs an emergency fund. Mr. Wouters says

The long-term lapse rate was lower than the industry expected, Mr. Fryer says. A decrease in assumed long-term lapse rates on lapse-supported products has a similar impact to a decrease in assumed long-term interest rates. “Long-term lapse rates under 1% per year is a common figure cited in the industry,” he continues.

“The lapse assumption is an important factor in the pricing of all life insurance products, particularly universal life with level cost of insurance,” says Mr. Kordovi

He points out that this assumption was not a determining factor in the rising level cost universal insurance rates at Transamerica. “The current lapse experience is in line with our expectations and consistent with Transamerica’s experience accumulated over the last 20 years. As a result, the price increase on UL with level COI was not a result of decreasing lapse rates,” Mr. Kordovi says. He observed that 25% of level cost UL policies lapse after ten 10, and 35% after 20 years.

Tough times

The Globe and Mail recently reported that the Office of the Superintendent of Financial Institutions (OSFI) is becoming more rigorous about ensuring that insurers maintain sufficient regulatory capital. Insurers confirm this crackdown. The industry is sailing through rough waters, Mr. Wouters says. “It’s very tough times right now. Extremely low long term interest rates are what’s causing all the pain. On top of that, there’s stress tests and IFRS phase II.”

In 2010, insurers had to take two tests. In 2011 the number has risen to seven. These tests must take into account more than one scenario, which spawns a total of 14 simulations, Mr Wouters points out.

“These stress tests are now much more detailed and stringent than ever. They will lead to much higher capital requirements,” Mr. Wouters adds. The simulations evaluate the insurer’s capacity to absorb extreme stock market volatility, for example. In varied scenarios, they test actuarial assumptions such as mortality, lapse or interest rates.

Interviewed on the sidelines of an event in Montreal, Frank Swedlove, president of the Canadian Life and Health Insurance Association (CLHIA) told The Insurance and Investment Journal that the stress tests have become more severe. Despite the additional burden it puts on insurers, these tests are good for the financial health of the industry, Mr. Swedlove emphasizes. He says he is satisfied that the OSFI has given extra time to insurers which could not produce the results by the March 31, 2011 deadline.

The OSFI says that these tests have been around for years. However, it did tighten the screws in late 2009 by issuing a stricter guideline. Performed regularly, these simulations can evolve over time, says OSFI spokesperson Léonie Roux.

International Financial Reporting Standards are the “cherry on the sundae” for insurers. “In their current format, Phase II IFRS punish Canada, because we’re the only country manufacturing permanent life and health insurance with level premiums guaranteed for life,” Mr. Wouters comments. He is anxiously awaiting the outcome of two provisions that are sending shivers through the Canadian industry: mark to market value and the risk-free discount rate used to present value cash flows of an insurance contract liability.

Alain Thériault