Higher prices are coming to life insurance products after one of Canada’s Big Five insurers said sustained low interest rates have forced it to hike premiums in various product lines.

Facing what one financial analyst calls “the perfect storm,” Toronto-based Manulife Financial Corp. is raising rates on several key life insurance products that come with guarantees — and industry-watchers say much of the insurance sector is expected to follow the insurance behemoth, which is a leader in many categories, sooner or later.

In a note to advisors, Manulife says precise numbers are to come, but, on average, prices will rise by 10% — effective Dec. 4 — for any new coverage provided by level-cost-of-insurance universal-life policies. This applies to four products offered by Manulife, including its limited-pay UL product.

Pricing changes this broad are rare in the insurance sector.

In an email to Investment Exec-utive, Steven Parker, Manu-life’s assistant vice president of products and marketing for individual insurance, says that LCOI has become the dominant form of UL in Canada — and it’s heavily reliant on assumptions about interest rates, which have declined during the past 25 years.

“Our current generation of UL products were originally priced 15 years ago,” says Parker, “when interest rates were more than double what they are today. We have seen mortality improvements over time, but they are not enough to make up for the decrease in interest rates.”

As the name implies, LCOI guarantees a “level cost” of premium pricing throughout the life of an in-force contract, meaning that the insurance company can’t account for changes to interest rate assumptions over the life of the policy via the premium cost. As interest rates have dropped, these products stretch profitability.

The highest increases will apply to joint second-to-die policies, as well as those taken out by younger people and females. Advisors will notice smaller price increases on policies for males and clients in older age groups, with prices on policies for some older age groups not changing.

Rates on two term-insurance (a.k.a. term-100) products also will increase in the spring, adds Parker, while two other UL products will see price decreases.

INCREASES CONSIDERED

For many years, insurers in Canada have considered hiking rates on UL products, having said as much in annual surveys conducted by Munich Re-insurance Co. of Canada, says Byren Innes, principal and senior vice president of NewLink Group Inc. , a Toronto-based consultant to the life insurance sector: “What is new is that someone is doing something about it.”

When a big player such as Manulife makes a move, it’s inevitable that prices will rise over the long term. Over the short term, however, Innes describes the situation as “a game of chicken.@page_break@“Companies will either hang [Manulife] out there and try to take market share,” he explains, “or they’ll delay their own price increases. It may be the best to be the last guy to do this [price hike]. It’s going to be a game of wait and see. What’s the trade-off between ROI on the product line and picking up market share?”

Through October, Manulife has taken in a lot of new business at the lower prices, he adds.

Some other insurance firms have already tinkered with their product prices. Among them is Toronto-based Transamerica Life Canada, ultimately owned by AEGON NV of the Netherlands, which adjusted its UL prices in April and raised prices on LCOI for policies with face amounts more than $500,000. For policies with values below that threshold, prices “should remain competitive with the market” says Joe Kordovi, vice president of life products and pricing actuary with Transamerica.

Toronto-based Sun Life Finan-cial Inc. , for its part, has left itself some wiggle room to see how the market shakes out. Says Paul Fryer, vice president, individual insurance, with Sun Life: “[We continue] to monitor consumer trends, competitor offerings and the economic environment.”

One insurer that says it won’t move on Manulife’s news — at least, in the short term — is Montreal-based Standard Life Assurance Co. of Canada. It already made price changes in 2005.

LOW INTEREST RATES

“Industry data have shown for years that premiums for permanent life insurance products — in particular, UL LCOI — were not reflecting the reality of the market, especially in the context of low interest rates,” says Michel Fortin, vice president, retail markets, with Standard Life, which is owned by Britain-based Standard Life PLC.

From a shareholder’s perspective, Manulife may be making good on its CEO’s comment, made during its second-quarter analyst and shareholder call, to favour margins over market share. In the call in early August, Don Guloein had said, “We are emphasizing margins over market share” and added that repricing could give the company “greater downside protection.”

There are factors in addition to low interest rates that are contributing to the price increase, says Moshe Milevsky, finance professor at the Schulich School of Business at Toronto’s York University and a past advisor to Manulife: “Regulation and capital requirements guidelines — they all filter through to reserving requirements and to how much companies have to charge for these things.”

Manulife says it would have made the pricing changes regardless of its second-quarter 2010 financial results, which saw a record loss of $2.4 billion.

But analysts, Milevsky included, note that the company’s challenges with its variable-annuities business in the U.S. and lesser known troubles with its long-term care product — both products are sold mostly by John Hancock Financial Services Inc., the U.S. subsidiary it bought in 2004 — are a factor in the decision to raise prices.

Eva Sverdlova, senior financial analyst with A.M. Best Co. Inc. in New Jersey, says the ratings company is still reviewing Manulife’s financial strength, given all of these factors: “It is facing the perfect storm.” IE