Price hikes threaten affordability?

The increases are hardly subtle. Within universal life policies, for instance, the level cost of insurance has increased by 30%-40% across the sector in the past two years, according to Steven Parker, assistant vice president of insurance product development at Toronto-based Manulife Financial Corp.

“The sustained low interest rate environment that we’re in has caused us to reprice all of these products that are long duration in nature,” says Parker. “It’s mostly just so that we can ensure the long-term viability of these products.”

In Manulife’s case, the level cost of insurance in universal life policies has risen by an average of 40%, taking into account three increases since late 2010. Other companies have implemented similarly steep increases. Kingston, Ont.-based Empire Life Insurance Co. recently raised the level cost of insurance within its universal life plans by an average of 20%. That followed an increase in the range of 7%-10% in February.

Rates on whole life and long-term health policies have risen at a similarly rapid pace.

“All of the companies are doing it,” says John Dargie, president of Mississauga, Ont.-based Independent Financial Brokers of Canada. “It is a major concern out there.”

Dargie believes that permanent insurance has become unaffordable for most Canadians, and he fears it will become even more expensive. “The [recent] price increase, I’m led to believe, is not the final increase. It’s the start of more price increases,” he says. “It will become a luxury.”

Although price adjustments aren’t uncommon in the life insurance sector, insurers admit that the frequency and severity of the recent repricing activity has been significant by historical standards.

“We don’t often reprice our products that regularly,” says Saundra Edwards, assistant vice president of marketing at Canada Life Assurance Corp. in London, Ont. “You tend to set the prices and then hold them — for a couple of years, anyway. So, it is unusual that we would see a couple of repricings in one year.”

The main driver of the price increases are the ultra-low interest rates, which have drastically reduced the level of returns that insurers are able to earn on the premiums they invest in the marketplace. This has squeezed the profitability of long-term products, and has made them riskier for insurers to carry.

“There are very few places you can go and actually get a decent return on a guaranteed basis — that’s the issue,” says Peter Wouters, director of both tax and estate planning and retail insurance products and marketing with Empire Life. “We’re providing guarantees that last longer than 30 or 40 years, and you can’t find investments that have guaranteed returns that last that long.”

Also contributing to the trend are increasingly stringent capital-reserve requirements, adds Wouters: “The capital that we’re told to set aside, those requirements are getting tougher and tougher. Now, the [sector] is scrambling to see how we can shore up that capital.”

Premiums are rising most dramatically for younger policyholders, as the liabilities associated with those policies are longer-term in nature.

At Empire Life, for instance, whole life insurance rates increased in November by 45% for younger policyholders, compared with 9% for older policyholders. Overall, rates increased by an average of 21%.

Despite the rate hikes, insurers argue, long-term insurance products still hold value for clients. The insurers point out that because competitive pressures have pushed the prices of these products down over many years, the recent increases are simply bringing prices back to their previous levels.

“The rates today are probably still lower than they were 30 years ago,” says Wouters. “I would say that some products in the marketplace are still underpriced.”

Some advisors, however, find that the cost of permanent life insurance has already become too expensive for many clients to justify.

“The value of permanent plans is going away,” says Mimi Lee, an independent insurance advisor and owner of TruFinancial Consultants in Markham, Ont.

As fewer Canadians feel they’re able to afford permanent insurance policies, sector sales are likely to be affected. Already, sales of universal life policies have declined, according to Parker.

Dargie suspects that this trend will continue. “I think it will have an effect on sales going into the [new] year,” he says.

As an alternative to raising prices, some insurance companies are pulling some of their long-term guaranteed products off the shelf entirely. Mississauga, Ont.-based RBC Life Insurance Co., for instance, announced in June that it was suspending new sales of universal life, term 100 and several living-benefits insurance products.

Other companies — in an effort to avoid discontinuing products entirely — are removing some of the “limited pay” options that have allowed policyholders to pay premiums for a fixed period in order to be insured for life.

Manulife, for instance, has removed the limited pay options on its long-term care product. Similarly, Empire Life is discontinuing sales of its 20 Pay Solution whole life insurance product.

“The pressure on that [20 Pay Solution product],” Wouters says, “from a capital perspective and a profitability perspective, was just so extreme that we just decided to withdraw it.”

Lee anticipates that other insurers will follow suit. “Eventually,” she says, “a lot of the policies with really good value for clients are going to disappear.”

As this trend unfolds, term products — which typically are less expensive than permanent plans (at least, for younger clients) — may become the only affordable option for many Canadians. In contrast with long-term insurance policies, some term policies are actually becoming less expensive.

Companies such as Canada Life have reduced the rates on these plans in recent months.

“We had some room to move,” says Edwards. “And we responded to that with a bit of a price decrease back in June.”

However, term policies aren’t ideal for everyone — especially older clients, Dargie says: “If all we’re left to sell is 10-year term, it’s profitable for the insurance companies; but it’s no good for people aged 50 and up, because it then becomes extremely prohibitive price-wise. That is a real issue.”  IE