Long-term interest rates continue to sink the profitability of level cost universal life insurance. Insurers are using a familiar remedy: raising UL prices. A third wave of pricing increases has hit the industry and insurers hint at a fourth wave if interest rates continue to drag.Low long-term interest rates are eroding the profitability margins of this product, whose premiums are guaranteed for life. Each time rates drop, they magnify promises to policyholders for the next 20, 30 or 40 years. In fact, interest rates have sunk to record lows. On Aug. 27, Canada long-term bonds (over 10 years) offered interest rates of 2.38%, versus 3.01% a year earlier, the Bank of Canada reports.

By press time, the major players had made the third round of UL price hikes official. Sun Life Financial and Canada Life each announced that their level cost universal life rates would rise on Sept. 17. Manulife Financial took a similar stance in July.

At Sun Life, the SunUniversalLife, SunUniversalLife MAX and Sun Limited Pay Life products have been targeted. Rates for the first two products will climb 3%, and those of the third will leap by 5%.

Paul Fryer, vice-president, individual business management at Sun Life, points out that interest rates are a key ingredient in the pricing of a guaranteed level premium permanent product like level cost universal life.
“Dramatic drops in interest rates to historic lows coupled with an outlook for continued low interest rates have now driven three waves of Level COI rate increases. It has proven difficult to predict what will happen in the future. Further deterioration in the economic environment could drive further increases,” he told The Insurance and Investment Journal in an interview.

To explain the level cost increase of 7% for all age brackets in Millennium Universal Life, Canada Life issued a similar message. “Our most recent increase (announced recently and effective in September) is to reflect the continuing low interest rate environment and the impact it has on investments backing our product liabilities.

Further increases may be required if interest rates continue to decrease,” says Saundra Edwards, assistant vice-president, individual life insurance marketing, at Great-West, Canada-Life and London Life.

For limited pay COI, rate increases will average 11.5% for all ages. “Rate increases will be higher for ages 20 – 50,” a memo to advisors confirms. Rates of Level COI will increase by about 12.5%, compared with average rate increases of 18.5% for ages 20 – 50 for limited-pay COI.

Sweeping rate increases

On that date, insured’s premiums invested in the Economic Trends Balanced Index Account will be transferred to the Growth Balanced Index Account. Investments in the Canadian Equity Account will shift to the Fidelity Large-cap Canadian Account. Lastly, the contents of the Manulife Simplicity Aggressive Portfolio Account will move to the Simplicity Growth Portfolio Account.

The cumulative effect of these rounds of pricing increases is a global average increase of 30% to 40% in the Canadian level COI market, Louis-Charles Leclerc, individual insurance product director at Industrial Alliance estimates. When interviewed by The Insurance and Investment Journal, however, he said that the insurer is not content with current premium levels. “Insurers are in catch-up mode, because long-term interest rates have fallen too much. They are in a sort of survival mode for permanent products,” he explains.

Performance guarantees

Lowering performance guarantees has become critical to ensuring the profitability of level cost products. Barely two years ago, insurers commonly promised to credit interest rates of at least 3% to 3.5% in the 10-year guaranteed interest account of their universal life policies. Falling rates forced them to reduce their performance guarantees in recent weeks.

On Sept. 17, Sun Life lowered its minimum interest offered in the 5-year guaranteed interest account GICs to 0.5%. The minimum interest rate on 10 to 20 year GICs slumped to 1.5%. The minimum interest rate for the long-term limited pay managed portfolio product also fell to 1.5%.

Canada Life is lowering its 5-year guaranteed interest options from 1.5% to 0.5%. 10-year GIOs in the Millennium account are sinking from 2.75% to 2.0%.

Foresters cut the guaranteed minimum interest rates on its UL on Sept. 17. The rate is now 0% for the one-year guaranteed interest option, 0.25% for the three-year guaranteed interest option, 1% for the five-year option and 1.5% for the eight-year option. Previously, the insurer offered 2.5% minimum guaranteed interest rates on all guaranteed interest options.

“To guarantee a 3% rate for a universal life interest account, the insurer would have to invest in assets with a return of about 5.25%,” Mr. Leclerc points out. This spread represents the costs of salaries, expenses (including advisors’ commissions), other bonuses offered on universal life and the insurer’s profit margin.

Some players have also decided to close products. Following RBC Insurance earlier this year, Foresters will be shelving Passport, its level cost UL on Sept. 17, keeping only its annual renewable term version.

Assumption Life stopped offering universal life (Odyssey) altogether in July because it no longer fit into its business model, which focuses on products advisors can access online. The Moncton, New Brunswick-based mutual says that it sells 9/10th of its products on the Internet, and that the products dropped account for only 12% of its sales. Yet the insurer concedes that interest rates factored into its decision to curtail several other products.