Despite historic low interest rates, there are several factors expected to drive growth in the Canadian life insurance market by 2018 including insurers’ strong capital base and innovative product development
Rising employment and increased consumer confidence, together with insurers in Canada adopting innovative pricing and risk-averse strategies for their products, mean the gross written premium of the Canadian life segment is expected to increase from CAD53.4bn ($43.4bn) in 2013 to CAD63.6bn by 2018.
This is one of the highlights from the Timetric report, Life Insurance in Canada, Key Trends and Opportunities to 2018, which is available at the Insurance Intelligence Center.
Life insurance is the largest segment in the Canadian insurance industry, accounting for 39.8% of its gross written premium in 2013. It is also the most developed segment, with a penetration rate of 2.3% in 2013.
However, the segment posted a compound annual growth rate (CAGR) of -0.2% during 2009-2013 to reach a value of CAD53.4bn in 2013. The segment’s decline was associated with prolonged low interest rates, rising levels of household debt and weak economic development.
Looking ahead to 2018 though, the main factors expected to drive growth in the Canadian life insurance market include:
- Strong capital base of insurers
- Revised eligibility criteria for old age security
- Innovative product development
- Increasing life expectancy
Strong capital base of insurers: The Canadian life segment is open to foreign insurers and therefore has access to capital from foreign sources. The minimum continuing capital and surplus requirement (MCCSR) ratio (which measures an insurer’s capital strength) among Canadian life and health insurers stood at 242% in 2013 – significantly above the minimum requirement from the Office of the Superintendent of Financial Institutions (OSFI) in Canada of 150%.
A sufficiently-capitalized life insurance segment is expected to present a stable performance with minimum systematic risk over 2013-2018.
Revised eligibility criteria for old age security: The govern¬ment has increased the age eligibility criteria for old-age security (OAS) and guaranteed income supplement (GIS) benefits from 65 to 67 years, with effect from April 2023.
The change will enable individuals to plan retirement solutions in advance and encourage insurers to launch products to suit customers’ needs.
Innovative product development: Demand for products has changed with the changing economic environment, with insurers introducing customized policies to suit customers’ needs.
For example, Manulife Financial Corporation launched Manulife UL in May 2014, a universal life plan which provides both life insurance and investment benefits. Under this plan, the insurer can select the level cost of insurance and a yearly renewable term. Customers can choose between a professionally managed balanced fund and customized investment option.
Increasing life expectancy: A World Health Organization report states that the life expectancy for men in the country increased from 74 years in 1990 to 80 years in 2013, while for women it rose from 81 to 84 years.
Rising life expectancy is expected to contribute to the Canadian life segment’s growth over 2013-2018.
There are also several challenges facing the Canadian life insur¬ance market. These include:
- A persistent low interest rate
- Increase in underwriting losses
A persistent low interest rate: The benchmark interest rate has remained at 1% since 2010. However, the Bank of Canada’s initiative to stimulate economic recovery had a negative impact on life insurers’ earnings during 2009-2013.
According to the IIC, insurers are suffering from reinvestment risk as assets are reinvested at lower interest rates, yielding lower returns. Consequently, insurers will find it hard to sell new policies when promised returns will diminish.
Increase in underwriting losses: Canadian life insurers are suf¬fering from a reduction in income due to low interest rates coupled with underwriting losses due to a high combined ratio.
The combined ratio of the life segment rose from 98.1% in 2009 to 118% in 2013 due to a rise in commission and expenses. The combined ratio is expected to remain at more than 100% between 2013 and 2018, which is likely to put pressure on the overall earnings of life insurers.
A.M. Best notes that despite the continuing low interest rates and a lagging economic recovery, the Canadian life industry’s overall profitability increased in 2013 for the third straight year.
The ratings agency said the industry benefited from strong equity market returns and a benign credit environment, as well as self-directed actions such as re-pricing products and focusing more on fee-based income.
According to A.M. Best, the Canadian l life insurance sector continues to benefit from solid risk-adjusted capitalization, risk-focused decision making by management, improved earnings with low credit impairments, strong growth in assets under manage¬ment and an ongoing focus on wealth management.
In a report titled Canada’s Growth Offsets Turbulent Industry Climate, A.M. Best said: "While continuing to concentrate on investments, life insurers have reinvested organically as well as through acquisitions in chosen growth areas. Reduced leverage and refinancing of existing debt also have been positive rating factors for the industry."
Individual life products dominated the Canadian life insurance market with 95.5% of the volume of products in 2013, according to the IIC.
Group life products accounted for the remaining 4.5%. However, in terms of gross written premium, individual life insurance accounted for 80.8% of the overall segment, while group life accounted for 19.2% in 2013.
To target the individual segment, Forresters Life Insurance Company introduced Familylife, a whole life insurance product in April 2013 which offers customised financial protection to policyholders.
As a participating policy, the plan provides dividends to the insured that can be used to increase cover, decrease premiums, or can be received in cash.
The policy provides built-in children’s term insurance, a quit-smoking incentive and convenient pay periods. A recent fall in the unemployment rate is also encouraging for life insurers in Canada.
The Canadian insurance distribution network has undergone a shift during the last two decades, with the advent of new distribu¬tion platforms and the internet.
During the 1980s and 1990s, all Canadian life insurance poli¬cies were sold by captive agents. Some firms such as State Farm, Co-operators and Primerica still distribute life policies through captive agents.
Aside from selling life insurance products directly to customers, distribution channels such as brokers, bancassurance, agencies, ecommerce and others enabled life insurers to generate new businesses in 2013.
Agencies were the largest distribution channel for the life segment with 61.3% of the new business gross written premium in 2013.
The number of agencies rose from 9,515 in 2009 to 10,423 in 2013, as they have close relationships with insurers and pension providers, and operate in insurers’ interests.
However, the number of policies sold through agencies fell from 6.8m in 2009 to 6.3m in 2013, due to the emergence of new cost-effective distribution channels such as e-commerce. Furthermore, the share of agencies is expected to decline to 60.7% by 2018.
Brokers were the second-largest distribution channel, account¬ing for 32.5% of the new business gross written premium in 2013.
The number of policies sold through brokers fell from 3.8m in 2009 to 3.4m in 2013; however the number of brokers rose from 18,356 in 2009 to 19,600 in 2013, driven by the performance of the life segment during the review period.
Direct marketing was the third-largest distribution channel in 2013 in terms of new business gross written premium.
The importance of the channel is closely linked to the economic measures as insurers aim to sell products directly to customers to reduce administrative costs. Consequently, the number of direct marketing distributors in Canada increased from 27,505 in 2009 to 29,171 in 2013.
Unlike Europe, where bancassurance is well developed, Canada has a strict demarcation between banks and life insurers. Even banks that own life insurance businesses are not permitted to actively promote products.
This restricts Canadian banks from using their client databases to cross-sell insurance.
However, the number of bancassurance channels rose from 54 in 2009 to 64 in 2013.
Canada is a federal state consisting of 10 provinces and three territories. The Canadian insurance industry is regulated on both federal and provincial levels.
In addition to the federal insurance regulator, OSFI, there are regulators for each province and territory.
However, in order to maintain uniformity in insurance regulation across Canadian provinces and territories, an interjurisdictional association of insurance regulators called the Canadian Council of Insurance Regulators (CCIR) was set up in 1914.
The regulatory frameworks at the federal and provincial levels differ. A company operating in more than one province is regulated by the federal regulation, but it has to obtain a licence in each province in which it carries out the insurance business.
OSFI also regulates the established foreign insurance companies and the branches of foreign insurers licensed to conduct insurance business in Canada.
In order to strengthen the existing regulatory framework for federally regulated life insurance companies, OSFI released the new Life Insurance Regulatory Framework in September 2012.
The new framework proposed many changes in the existing regulatory framework, which are to be implemented over a period ending 2016.
Through the issued regulatory framework, the OSFI is seeking feedback and consultation from various stakeholders.
The proposed regulatory initiatives are expected to overhaul the existing life insurance regulatory framework in the country in terms of corporate governance, risk management and capital requirements of life insurance companies operating in the country.
Canada’s life segment is dominated by domestic insurers. The segment is highly concentrated, with the 10 leading companies accounting for 97.1% of the segment’s gross written premium in 2013.
Manulife Financial dominated the segment with a 36% share in 2013, and the three leading operators, Manulife Financial, Great-West Life and Sun Life Financial, collectively accounting for 87.7% of the segment’s total gross written premium.
Maintaining market share for leading companies is challenging, and requires a constant focus on cost-efficiency and product innovation.
Low interest rates and volatile equity-market conditions are also prompting companies to re-examine their product and pric¬ing strategies.
Manulife Financial, Great-West Life, Sun Life and Standard Life recorded declines in investment income in 2013 compared to 2012.
Overall, the future growth prospects for the segment will depend on insurers’ approach to issues, such as streamlining cost structures and focusing on consumer behavio