Insurance advisors should prepare for a shakeup in the roster of life insurance products they sell in 2018. Some products are poised to become more expensive, some are set to become less expensive and others may disappear altogether.
Factors such as rising interest rates, new capital requirements and competitive pressures are affecting life insurance products in various ways. Although the products themselves aren’t expected to undergo drastic changes in the year ahead, pricing is likely to shift for some products, and insurers are re-evaluating the viability of others.
Permanent life insurance products, such as level-cost universal life (UL) and whole life, are likely to become more costly.
“The pressure will continue on permanent products,” says Byren Innes, senior strategic advisor, financial services consulting and deals, with PricewaterhouseCoopers LLP (PwC) in Toronto.
This trend is being driven in part by new capital requirements. The Office of the Superintendent of Financial Institutions‘ new regime for insurers, called the life insurance capital adequacy test, came into effect on Jan. 1. It’s expected to affect the profitability of certain products and could lead to higher prices or even the elimination of some products with long-term guarantees, such as level-cost UL.
“We should see more and more insurers and advisors leaving the UL level-cost market,” says Louis-Charles Leclerc, director of individual insurance products with Quebec City-based Industrial Alliance Insurance and Financial Services Inc. (IA). “With the new capital requirements, this product either will be withdrawn from the market or will have premium increases.”
The cost of many permanent life insurance products already has been trending higher. Toronto-based Manulife Financial Corp., for example, hiked the cost of some UL products in September, and IA increased premiums on some limited-pay UL options by an average of 20% this month.
“We’re getting another round of rate increases on permanent products,” says Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto.
That trend may be “perplexing,” Tward says, given that interest rates have begun to increase – a factor that typically enables insurers to earn higher returns and, therefore, reduce premiums. But in order for insurers to cut premiums on products with long-term guarantees, he says, those companies need to see increases in long-term interest rates – not just short-term rates.
That could happen this year, assuming the economy co-operates, Tward adds: “If economic growth, wage growth and inflation pick up – all things that are expected for 2018 – then you’re going to begin seeing longer-term interest rates tick upward. Then, maybe, pricing will begin to come down on permanent insurance.”
Even with a considerable boost in interest rates, however, advisors shouldn’t expect dramatic premium cuts, Innes says: “Companies already are pricing some kind of interest rate improvement into their products.”
As the cost of guaranteed products creeps higher, products without those level premiums – such as yearly renewable term (YRT) UL products – are likely to become more attractive, Leclerc says. Given that premiums on YRT policies increase every year and become markedly more expensive over time, many advisors tend to avoid YRT. As the cost of level premiums becomes unaffordable for many clients, however, YRT could become a viable option.
“More advisors will be comfortable recommending this kind of product,” Leclerc says.
In the term insurance market, many carriers recently reduced premiums, leaving advisors with plenty of affordable options to offer to their clients this year.
However, those reductions could come to a halt. After several years of competitive pressures, insurers don’t have much room left for further cuts, Innes says, adding: “You may see a bit of an end to term wars, to some degree.”
In the segregated fund market, fees also are trending lower. Insurers such as Mississauga, Ont.-based RBC Life Insurance Co. and IA reduced management fees on some seg funds in recent months, and further reductions are likely this year. This trend is being driven in part by both increasing focus on fees among clients and competition from a growing variety of low-cost investment options, such as ETFs.
In addition, the Canadian Council of Insurance Regulators unveiled new disclosure rules for seg funds in December that soon will require insurance companies to provide clients with more detailed information about seg fund costs. (See story on page 1.)
Furthermore, expectations are not high for the living benefits arena in 2018. Long-term care (LTC) insurance appears to be on its last legs, with sales continuing to lag. Manulife discontinued new sales of its LTC insurance product in November 2017, and Lévis, Que.-based Desjardins Financial Security Life Assurance Co. revealed that it would discontinue sales of its stand-alone LTC insurance product in June 2018.
Sales of critical illness (CI) insurance have been slightly stronger compared with LTC, and insurers such as IA recently tweaked their CI offerings in an effort to drive more sales. But with only a small proportion of advisors selling CI, that market remains limited.