With the prolonged low interest rate environment posing challenges for life insurance companies that offer long-term, guaranteed products, some insurers are launching a new generation of products with premiums that fluctuate as interest rates change over time.
These products reflect efforts by the insurers to offer permanent policies that are more viable in the long run and to appeal to consumers through the prospect of lower premiums in the future.
“[Insurers] are moving away from the guaranteed stuff and more toward variable pricing,” says Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto. “It allows them to charge a high [premium] today and they can justify it by saying you’ll get positive adjustments in the future as [interest] rates go up rather than feeling stuck at a high premium.”
So far, two insurers – Kingston, Ont.-based Empire Life Insurance Co. and Quebec City-based Industrial Alliance Insurance and Financial Services Inc. – have launched versions of the adjustable life insurance products.
Other insurers are expected to unveil their own versions of the products in the months to come.
“Once the floodgates open, I think pretty much everybody is going to follow,” says Paul Brown, chairman and CEO of IDC Worldsource Insurance Network Inc. in Vancouver.
These variable-rate products are permanent and structured in such a way that if interest rates rise, premiums would drop; if interest rates drop, premiums would rise.
“We thought that it could fill the needs of certain clients to offer a new product that could be adjusted based on the interest rate, so that clients could benefit from a lower premium if the interest rate increased in the future,” says Pierre-Laurence Marchand, product development analyst with Industrial Alliance.
The new product from Industrial Alliance, called Trend, is a universal life policy that comes with a guaranteed premium for the first 10 years of the policy. The premium then is adjusted every five years to a level determined by the average long-term provincial bond yield over the previous five years.
“We take a five-year average to smooth the results for the clients,” Marchand says, “just to be sure that the client isn’t getting locked in at the lowest interest rate.”
Empire Life’s product, called Hybrid Solution 100, has premiums that are adjusted every year. The adjustments are based on the average Government of Canada long-term bond yield for the last six months of the previous calendar year.
By tying the premium adjustments directly to changes in external interest rate benchmarks, both insurance companies are striving to make the products as transparent as possible.
“There is no insurer discretion,” says Marchand. “We wanted to be transparent. The only thing that could change the premium is really just the interest rate.”
For both companies’ products, the premium schedule in the contract stipulates the amount that the policyholder would pay within each range of long-term interest rates, as well as the guaranteed minimum and maximum premium.
“Everyone has a full line of sight as to the maximum and minimum they could pay, regardless of the interest rate range,” says Sean Kilburn, senior vice president of life insurance with Empire Life.
The launch of these products comes as insurers have drastically increased the premiums on permanent policies with level cost of insurance, thanks to the low interest rates and high capital requirements that have reduced the profitability of these products.
As a result, sales of permanent life products are dropping as clients become reluctant to lock into policies at a time when premiums are inflated.
“Sales have been going down in general,” Marchand says, “for the industry for universal life.”
The adjustable products aim to appeal to clients who have been spooked about buying permanent products by the prospect of paying high premiums for life.
“[These new products] are allowing clients to benefit from a rising rate environment,” Tward says, “so clients don’t feel that they’re locking in at the worst possible time.”
The new products also are more manageable, from the insurer’s perspective, as they transfer some of the interest rate risk to policyholders and reduce the insurer’s capital requirements considerably compared with products that have guaranteed premiums.
“What this does,” says Kilburn, “is it effectively moves into a class of product that has lower capital demands. And those lower capital demands are passed on to the consumer in terms of better pricing flexibility.”
Furthermore, adjustability of premiums means that insurers won’t have to reprice the product to adapt continually to the changing economic environment, as has been the case with many of insurers’ existing products.
“The Hybrid is designed,” Kilburn says, “to be able to handle all of those changes in interest rates without having to make dramatic changes to your initial pricing for the entire market. It has that ‘always current’ pricing.”
The degree to which clients will embrace the adjustable products remains to be seen, given that the adjustable products are still very new to the market. Brown suspects that the products could be a tough sell among clients who are accustomed to guaranteed premiums.
“When you’ve spent your past 20 to 25 years being able to say to clients: ‘This is the rate that’s absolutely guaranteed’,” Brown says, “and now you have something that’s a moving target, that makes it difficult.”
However, Tward believes that some clients will welcome the products – particularly if they believe interest rates will rise: “I think they’re open to it if they’re educated as to what the [interest] rate environment looks like. Rates, at some point, have to normalize.”
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