Low interest rates have diminished the profitability of level cost universal life insurance for years. Although fierce competition may have overruled common sense for some time, manufacturers no longer have a choice. Long-term interest rates have finally forced changes.

Based on outdated actuarial assumptions, level cost universal life insurance needed a serious overhaul to return to profitability. After bottoming out in 2008, long-term interest rates once again fell below 3.5% just before year end. This drop, one of many, finally convinced actuaries. A major player hiked its prices in December, and several rivals followed.

Long-term interest rates guide actuaries’ pricing of permanent products with guaranteed premiums. Level cost universal life is one example. In the first few years, the premiums received from insured surpass the claims payable. A few decades later, the pendulum swings in the other direction. Insurers must therefore invest the premiums received early on in long-term government bonds to offset future shortfalls.

This prudent approach also characterizes many other permanent products such as participating whole life insurance and T100 term insurance. Little influenced by interest rates, yearly renewable term UL insurance has avoided rate increases. On the contrary, this short-term temporary product is priced to follow the evolution of the mortality curve.
Faced with anemic profitability of level cost products, insurers have long been dreaming of raising prices. Several players had not reviewed their interest rate assumptions since the mid-1990s.

On Dec. 4, Manulife Financial raised its level cost product. It was not the first to do so, but it triggered a domino effect. Industrial Alliance boosted its level cost on Jan.17. Sun Life Financial followed on Jan. 28 and Canada Life did the same on Feb. 7. Empire Life announced that it would make a similar move during the first quarter.

We were seeing long-term rates decline in each of the first nine months of 2010. It had become clear that the rates would not return to their previous levels. But the market is very competitive. When one decided to raise rates, the others said ‘finally,’” Yvon Charest, president and CEO of Industrial Alliance, told The Insurance and Investment Journal. With this generalized increase, he thinks the industry has solved its interest rate problem for 2011.

Sun Life explains the increase to its advisors on its website: Interest rates have continued to fall, with long-term Canadian bond yields falling to their lowest levels in recent history…This continued low interest rate environment puts pressure on margins for permanent guaranteed level cost of insurance products…We are taking action to ensure our products maintain their value for clients, advisors and shareholders.”

Transamerica Life Canada acted last year, but its initiative made few ripples. The insurer adjusted the level cost of universal life for insurance amounts of up to $500,000. Standard Life Canada increased its level cost five years ago for profitability reasons.

At Manulife, the increase affects the Innovision, UltraVision Security; and Sun Limited Pay products We’ve changed the rates 10% on average, dependent on which products, ages, and female-male distinction. It increased the most for joint last-to-die policies, younger ages and female. The increase has been smaller for male and older persons,” says Steven Parker, assistant vice-president for product and marketing of individual insurance and living benefits at Manulife.
On April 1, Manulife plans to revise the guarantees on the long-term investment options of its universal policies. It will reduce the guaranteed rates by 50 basis points. For example, the guaranteed interest rate on the 20-year option will dip from 3% to 2.5%. In the same quarter, the insurer also intends to ...