Insurers are increasingly limiting the amounts they agree to insure at the standard rate in level cost policies.
With interest rates low, eking profits from whole life and level cost universal life insurance products is a mounting challenge. In response, several companies have reduced the maximum life insurance amount that they grant to clients without requiring a surcharge.
This trend in level cost policies is forcing advisors who specialize in the entrepreneur and professional market to split large life insurance cases among several suppliers. That way advisors can offer the client a better price, as they remain within each insurer’s limits. Although this practice is not new, advisors are now slicing the pie into even smaller pieces.
PPI, a managing general agency operating across Canada, specializes in the high net worth clientele, primarily entrepreneurs. Its advisors frequently manage cases in the several million-dollar range.
Claude Ménard, senior vice-president, at PPI gives the example of two brothers who co-own a company. They each buy $150 million in insurance under a level cost universal life policy, at different times. The first obtains the full amount from three insurers in 2010, but a year later the second brother had to go to eight insurers to procure the same coverage.
This type of fragmentation affects the bonuses that advisors receive for large amounts. “The advisor gets only 60% of the compensation in the second case compared with the first case,” Mr. Ménard points out.
The culprit: interest rates. Their fluctuations are eating into the profitability of level cost products. Hiking level cost prices was insurers’ first response to the interest rate problem, says John E. McKay, executive vice-president and actuary at PPI. The industry would have acted sooner were it not for the competition.
“Until a couple of years ago, it was common practice tor insurers to price LCOI based on long-term yield assumptions in the 6% range. The reality is that insurers should have started to increase their LCOI rates as much as 10 years ago, as interest rates had already dropped to sufficiently low levels at that time to warrant price increases,” Mr. McKay says, adding that it’s not over: “Most insurers offering LCOI have already announced two rate increases over the last two years. We may see a third increase announced sometime later this year or early next,” he explains.
Lowering guaranteed rates within the products is another way to support profitability. In March, Manulife Financial lowered its minimum guaranteed interest rates in its universal policies InnoVision, Limited Pay UL and Security UL.
For its part, Sun Life Financial has reduced its dividend rate paid to whole life par policy holders This reduction is 0.25% for the period of April 1, 2012 to March 31, 2013.
Niche players have not escaped this trend. Assumption Life reduced rates offered in its guaranteed interest rate account for its UL product Odyssey. Its one year interest account rate has declined from a minimum guaranteed rate of 2% to 1%. The three-year account rate dropped from a a guarantee of 2.5% to 1.25%. The five-year account dropped from 3.5% to 1.50%.
This series of hikes or cuts in guarantees in universal life are not enough. Insurers also want to avoid sustaining losses on very large level cost universal policies, Mr. McKay explains.
“Until the last few years, it was common for these LCOI maximum face amounts limits to be $20 million but some insurers set their limits at $50 million or more. Virtually all insurers reduced their maximum face amount limits for LCOI and sometimes to as low as $5 million,” Mr. McKay points out.
Often, clients who exceed the limit will be slapped with a hefty surcharge, the PPI chief actuary explains. Some insurers set this premium according to a percentage of the insured amount. John McKay says that the situation gets complicated for advisors when clients pass the limits.
“The complication starts with the fact that the agent could not tell a prospective client how much the insurance would cost. The process was further complicated by virtue of the fact that the surcharges could best be minimized only if the desired total coverage was broken into separate policies placed with different insurers,” Mr. McKay explains.
BMO Life Insurance set a limit of $10 million in its LCOI projection software. This limit is not new, Daniel Walsh, vice-president, business development explains. “You hear about this trend a lot, but we didn’t change anything over here.”
Reinsurer agreements influence the limits insurers set for well-off clients. “We analyze the situation of each client whose insured amount exceeds the conditions foreseen in our reinsurance treaty,” Mr. Walsh says.
Transamerica Life Canada focuses on a middle-class clientele. The insurer also capped the automatic insured amount in its level cost policies at $10 million. “We preferred not to quote files beyond this limit. We think that advisors will insure the rest with another supplier,” Pierre Vincent, senior vice-president, product strategy & business profitability. Beyond a certain threshold, profitability is at stake, he adds.
All the same, such amounts make up only 1% of cases the insurer processes. More specialized in the high net worth market, an insurer like RBC Insurance would receive more. A dedicated network at PPI is working with private label products in cooperation with this insurer, including the universal life insurance concept and the 10-8 leverage loan strategy.
Sources at PPI mentioned that RBC lowered its maximum amounts. The insurer, however, did not confirm this.
Like their clients, reinsurers are limiting their share of the risk, says André Langlois, vice-president, development and marketing, individual insurance at Desjardins Financial Security (DFS).
“For a $15 million, $20 million or $25 million policy, often the reinsurer no longer has the capacity it needs. It has to turn to a retrocessionaire. The reinsurer probably cannot obtain the price originally agreed upon with the insurer,” Mr. Langlois continues.
Reinsurers and audits
Hélène Châtelain, vice-president & chief underwriter at Transamerica, attributes the declining maximum amounts to more prudent risk underwriting. She says that the laxity seen in the 1980s and 1990s gave way to tightening more recently.
With six life reinsurers operating in Canada today, each must swallow a larger portion of the risk pie, Ms. Châtelain explains. Munich Re, Swiss Re, RGA Canada, Scor Re, Optimum Reinsurance and Aurigen shared $47.3 billion in life insurance premium liability with insurers in 2010.
The most widespread practice in Canada is proportional reinsurance, where the insurer will keep 25% of the risk on one policy and cede 75% to the reinsurer.
To cover themselves, reinsurers turn to retrocessionaires. This market has also shrunk. Rating agency A.M. Best reported in 2011 that several players have left the life retrocession market. Sun Life Financial is one example. A.M. Best qualified the Canadian retrocession market as very concentrated.
Ms. Châtelain notes that insurers tend to keep less risk. “Because of interest rates and more stringent capital rules, we reinsure much more than in the past,” she says. Reinsurers must then divide up the risks among themselves.
Reinsurers are prudent, she adds. They audit their clients’ underwriting practices before deciding on the limit to grant for a given product. “Reinsurers rely on risk management and the insurers’ underwriting practices.” Beyond the authorized limits, the usual rates no longer apply, she adds. As a result, insurers have reduced their maximum amounts to protect the limits they have succeeded to obtain from their reinsurers.
John McKay, of PPI, thinks this phenomenon of reduced maximum amounts is only temporary – it should vanish with the next long-term rate hike, aided by steady rises in level cost prices. “As insurers bring their LCOI rates up to levels that provide more appropriate profitability in a low interest rate environment, the need for them to impose such large surcharges on larger face amount LCOI contracts should decline. Also, it may allow some of these insurers to increase the current maximum face amount limits which apply to LCOI to something closer to their past levels,” Mr. McKay says.
In contrast with universal life, whole life performance guarantees are rising.
Assumption Life recently improved the participation scale in its whole life product Par Plus. The interest rate of the participation scale thus rose to 6.45% for 2012, up from 6%. The insurer also lets customers add a FlexTerm T15, T20 or T25 rider with a disability insurance option, and the Youth Option rider.
Manulife Financial tweaked its nonparticipating whole life product Performax Gold. For the period of March 31, 2012 to March 30, 2013, the insurer raised the performance credit rate applicable to the contract. The performance credit increases the policy’s cash value or death benefit, or both, the insurer explained in an advisor newsletter.