Insurance companies are facing pressure to reinvigorate their product offerings in order to bolster client appetite, with several rounds of price hikes and diminishing guarantees having made many insurance products a tougher sell for financial advisors.
However, insurers must strike a careful balance between offering long-term guarantees that appeal to clients and managing the risks associated with those guarantees, which became strikingly apparent during the global financial crisis, according to Ernst & Young Global Ltd.‘s (EY) Canadian Life Insurance Outlook, 2014 report.
That report calls on the industry to develop more “innovative, attractive products” while keeping a close eye on profitability.
“In general,” says Doug McPhie, partner and Canadian insurance leader at EY, “insurance companies have been on the defensive in the past five years through the economic crisis.”
In particular, insurers have taken a variety of steps in recent years to reduce risk, meet higher capital requirements and adapt to the low interest rate environment, McPhie notes. This has led to lower guarantees and higher prices on insurance products with long-term guarantees, such as universal life (UL), whole life and critical illness (CI).
“They’ve been trying to rebuild capital, manage volatility and get their costs in order,” he says, “and I think they’ve done a really good job of that.”
Although these changes have been effective in reducing insurance companies’ risks and improving their balance sheets, the adjustments have made products less appealing to clients.
“[Insurers] have had to make all of these changes from a pricing point of view and from a profitability point of view,” says Byren Innes, senior strategic advisor, financial services consulting and deals, with Toronto-based PricewaterhouseCoopers LLP (PwC). “Their challenge has been to try and keep products attractive.”
More expensive products
For example, Innes points out that many products are 30%-40% more expensive than they were three years ago – and for clients in some age groups, some products are 70%-80% more expensive.
“This stuff is dramatically more expensive,” Innes says. “It’s not great news for consumers and it’s not necessarily good news for advisors – it’s harder to sell.”
Indeed, fewer clients are buying CI insurance. And on the life insurance side, says Lawrence Geller, president of Campbellville, Ont.-based L.I. Geller Insurance Agencies Ltd., a growing number of clients are opting for term policies as permanent insurance becomes increasingly expensive.
“We’re seeing a lot of people take 10-year term [life insurance] because it’s the cheapest,” Geller says. That’s concerning, he adds, because most clients need coverage for more than 10 years and the premiums on a term policy tend to be significantly more expensive upon renewal.
In addition to raising prices, many insurance companies have watered down product features considerably. For example, there are fewer limited-pay options that allow clients to fund their policy over the course of 10 or 20 years. As well, the level of guaranteed returns on insurance policies with an investment component has dropped significantly.
“They’re scaling back on the guarantees,” says Geller. And as guarantees are a popular feature with clients, he’s hopeful that this trend will reverse once interest rates rise: “I would hope that we start to see better long-term guarantees and higher cash values.”
With insurers having improved the state of their balance sheets, signs that companies are innovating on the product front are beginning to appear, which could mean good news for clients.
“They’re actually starting to get back into a more offensive position,” McPhie says. “They’re ready to get back into growth mode.”
Given the ongoing challenges, such as low interest rates, market volatility, higher capital requirements and new accounting rules, however, insurance companies still don’t have very much room to manoeuvre in taking on additional risk.
As well, with the financial crisis still fresh in insurers’ memories, these companies are likely to maintain a more cautious approach when offering guarantees – at least, for the foreseeable future.
Next: Crisis highlighted risks
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Crisis highlighted risks
Insurers that had sold a high volume of guaranteed minimum withdrawal benefit (GMWB) products were punished particularly severely during the crisis, when the generous guarantees on those products left insurers on the hook for billions of dollars as stock markets tumbled.
“The economic crisis highlighted the risks that the insurers have taken on,” says McPhie. “[Now,] they’re looking at products, trying to redesign them to find that equilibrium in risk sharing between the insurance companies and the customers.”
Some insurers, for example, recently have tried to transfer risk to GMWB policyholders by introducing products with premiums that fluctuate as interest rates change over time. Although this model does not incorporate the guarantees that many clients gravitate toward, Innes says, it presents an appealing alternative for clients who want to avoid locking into premiums at a time when they’re inflated. He hopes to see the insurance industry continue to innovate in this area.
“Generally speaking,” says Innes, “it’s the right kind of direction that companies need to go in to have responsive products.”
The insurance industry also should take steps to ensure its product offerings are evolving in a way that reflects the changing demographic landscape, according to the EY report. With significant intergenerational wealth transfer beginning to take place, McPhie says, insurers would be wise to continue enhancing their wealth-management product offerings and to provide products that resonate with younger clients.
“I think they realize that that’s a big market segment that they need to do a better job at,” McPhie says. “That’s an opportunity to capture a greater share of the wealth-accumulation market.”
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