Universal life market share crumbles

The latest price hikes are hitting universal life hard. The sales slide accelerated in the first quarter, and the product is lagging further and further behind whole life in terms of market share.Universal life’s market share of individual life insurance in Canada relative to that of whole life is the complete opposite of what it was five years ago, according to preliminary data for Q1 2013 that LIMRA shared with The Insurance and Investment Journal.

“Most of the shift in Canadian individual life sales has been a UL shift to whole life in terms of permanent products market shares,” LIMRA’s individual life insurance survey coordinator Karen Terry told The Insurance and Investment Journal.

From 53% in 2008, premiums in force of the star product of the last decade had shrunk to a mere 26% of total individual life insurance premiums in Canada by March 31, 2013. Whole life’s share grew to 45% of the market, a staggering increase from 23% five years ago. In 2012 alone, it grabbed 7% of the UL market share compared with 2011.

Term insurance consolidated its share from 22% to 29% during the same period. This product is known for withstanding long-term interest rate fluctuations.

Grueling first quarter

Universal life insurance had a particularly grueling first quarter in terms of annualized sales. Premiums declined by 19% compared with the same quarter in 2012. The number of universal life policies fell by 26% during this comparison period. The face amount in terms of universal life insurance declined in parallel during this comparison period.

After positive results in 2011, UL insurance premiums faltered last year. They ended 2012 14% lower than in 2011. The number of policies declined at a similar rate during this period.

Hampered by persistent low levels of long-term interest rates, the latest price increases took a toll. “Long-term interest rates are going to stay low for a while,” Ms. Terry predicts.

Interest rates are affecting both prices and product guarantees, like the minimum return promised for fixed-rate investment options. “We see the two strategies on the U.S. side as well as in Canada: companies are adjusting the features of the products to mitigate the low interest rate environment,” Ms. Terry adds.

Among the most recent changes, RBC Insurance lowered its minimum guaranteed interest rate on fixed-income investment options for RBC Universal Life. For example, for the T10 investment option the guaranteed rate slipped from 3.5% to 2% on its base product (without bonus).

Several insurers, like Manulife Financial, had already made this change: most also reduced the guarantee on the 10-year fixed option to 2%. A recent arrival on the market, SSQ Financial Group, set its rate at 2% in UL Protection. Others have been even more prudent about the 10-year fixed option: Empire Life offers 1.75%, Sun Life Financial, Great-West, Canada Life, Transamerica Life Canada and Desjardins Insurance 1.5%, BMO Insurance 1% and Industrial Alliance 0%.

As floor rates are expected to remain stable, the LIMRA analyst is hopeful that Canadian insurers will find imaginative ways to adapt that do not involve raising prices or removing guarantees. Ms. Terry mentions products with adjustable premiums as one example. Insurers subsequently adjust the initial premium to interest rate trends.

After UL Mutual in 2012 and Empire Life earlier this spring, Industrial Alliance joined the adjustable premium fray on June 3. Unlike its two competitors, it revamped its universal life (see article, page 25). At a speech given at the International Finance Club of Montreal on May 30, CEO Yvon Charest announced that Industrial Alliance launched this product – called Trend – in response to low long-term interest rates.

“The industry is transforming when it comes to long-term guaranteed products,” Mr. Charest says. “Insurers must give these products a wide berth, and that’s what we’re starting to do. He notes that the 35-year Canada bond rate sunk to a historical low in 2012, at 2.22%. By the time he gave his speech, it had edged back to 2.58%.

For its part, Empire Life has offered a whole life non-participating insurance product with adjustable premiums since April 1: Hybrid Solution 100. Coverage is level. Premiums (and cash values) are adjusted each year within a series of nine set amounts, each of which is tied to an interest rate range pegged to Canada bonds. The ranges that trigger an adjustment are divided between a maximum of less than 1% and 8%. Today, the product premium is set according to the 2% to 2.99% range.

Insured will pay lower premiums if long-term interest rates increase above the set range and a higher premium if they decrease. The insurer guarantees maximum and minimum premiums, level insurance coverage for life, and a minimum cash value.

Multiple price increases

“Canadian consumers and their advisors have dealt with multiple price increases and more limited permanent insurance product choices over the past two years due to prolonged low interest rates,” Sean Kilburn, senior vice-president, Life Insurance at Empire Life, said at the time of the launch. “We keep hearing that interest rates are going to rise and mortgages and other costs will go up.”

In June, UL Mutual extended its adjustable premium insurance concept Equitable launched in March 2012. The insurer initially introduced Adaptable Equitable. All the other permanent products inherit the Equitable concept, except universal life.

UL Mutual says it stands out from the competition in another way. “Unlike the adjustable products that are appearing on the market, the premium of our Equitable products can never exceed the initial premium, and our cash value scales do not vary according to interest rates,” says Luc Pellerin, executive vice-president and designated actuary at UL Mutual.

Products that became Equitable are Adaptable, whole life payable in 20 years, Integral, a policy with paid-up value, and critical illness products AdapCI and AdapCI Hybrid. “We spearheaded this idea last year, and we saw other companies follow our lead. It had become natural for us to extend the concept to our other permanent products. If more insurers launch such products, it will boost our sales,” Mr. Pellerin adds.

The next step

Other players asked about the trend were more discreet. “Unfortunately it is still too early for us to comment on this,” replies Kiara Famularo, communications advisor at RBC Insurance.

Although Manulife is rumoured to be about to launch a hybrid product, spokesperson Jana Miller says, “We don’t have any new product plans ready to share at this time.”

At BMO Life insurance, Steven Carter, senior vice-president, marketing, says “We’re definitely monitoring with interest the trend of adjustable premiums, especially since Empire Life’s launch.”

At this point, Mr. Carter does not foresee a product launch this year. However, he adds, “With profitability concerns brought by low interest rates, adjustable premiums seem like a very good idea to look at.”

Possible launch

BMO started discussions on a possible launch, which would not necessarily be an adjustable product. “We wonder whether or not it would be a whole life par product or a hybrid (like Empire Life’s Hybrid Solution 100). We didn’t reach any conclusions yet,” Mr. Carter continues.

The insurer has no plans to change its basic non-participating whole life product. “We have some fairly attractive non-par products: 20 Pay Life, Term 100 Plus and Term 100 Platinum,” he says. Sales of these products have grown at the expense of traditional whole life.

Mr. Carter adds that universal life is still the core of BMO’s business and that total sales are far superior to those of whole life. He expects declining universal life sales to stabilize and eventually rebound. “If long-term interest rates increase, it will take some of the pressure off insurers,” he says.