When I wrote this in very early 1973 I was three years out of university where I studied Canadian history and abstract mathematics after deciding actuarial science and law were too boring for my warped mind. My greatest “boss” ever, Bob Spittel, and the president at the time of Mercantile and General Reinsurance Canada, Ian Michie, pushed, encouraged, corralled or cajoled me into writing a paper for presentation at the Pacific Insurance Conference (a very prestigious event in the early days). If they liked my paper, if those in Canada who felt it was worthy of representing Canada at the conference and if I would deliver my first real big audience of elders (20 plus years my senior in age and experience) presentation M&G would send my dear wife and I to Japan for the actual conference.
Bob’s prodding and brotherly advice made it all possible. Ian thought that if my wife joined me in such an exotic location she would get pregnant and I would truly be a family man (a deeply held belief for all his male staff). His concept of fertility was somewhat antiquated and this idea was right up there with facing the bed along a north south axis! Bless you Ian for caring.
Anyway the paper past musters by all who signed off on it so off I went to represent Canada. When there my wife and I were treated as royalty since the Japanese loved the article being that it was different and less boring than all the others. The Japanese insurance industry furnished Sue and I with a butler and chauffer for the conference and its ancillary events while poor President Ian rode with all other delegates in buses. Looking back the article is so tame compared to much of my writing. Was it perhaps the long beautiful legs of my wife in the shortest of mini skirts (it is 1973) that really was the attraction and not my words?
Anyway if anyone wants the Japanese version I have it also but I cannot attest to the quality of translation or that it may indeed be better than the English version.
Pacific Insurance Conference – 1973
The Canadian Life insurance industry has relatively stabilized itself in the realm of new product development in the last couple of years. There are, however, various “old products” which have been revamped to exploit current market potential arising from government tax changes or economics inflation.
At the present time, over fifty life insurance companies operating in Canada are offering a form of variable contract in which the policyholder’s benefit is variable according to the performance of a special investment fund. Basically, there are five forms the variable contract takes: a decreasing term combined with and “increasing” investment fund: guaranteed level insurance plus accumulated fund values; minimum death benefit plus investment fund value; increasing minimum death benefit due to investment fund appreciation; and yearly adjusted death benefit either increased or decreased value. Sales results of all forms have been mediocre but one Canadian company has experienced sales far and above the Canadian Life Insurance Association’s most liberal predictions.
As a result of recent Canadian federal government tax legislation changes, life insurance companies are experiencing and all too needed influx of individual savings dollars back into the registered retirement savings plans. The market for these plans has grown considerably and there is every expectation that is trend will continue.
The tax legislation changes also provided an incentive for the sales of the income-averaging annuity. The annuity was not a new product but an old product adapted to entice the resultant sales from a market predicted to produce $12,000,000 of premium income per year.
Initial sales results of an inflation-linked family income plan have not be exactly encouraging, but rather discouraging. This plan, linked as it is to a cost-of-living index, could prove to be more marked in the future should inflation continue to devalue the dollar’s purchasing power.
The paper makes short mention of the deposit term type policy and its generally good sales results. The persistency problem is very negligible with this plan and companies are able to almost ignore the problems of the early lapse.
The almost totally revised federal Unemployment Insurance Act necessitated a revision of privately offered accident and sickness insurance coverage. With the exception of the self -employed, the federal unemployment scheme provided mandatory accident and sickness benefits to all employed Canadians. Three approaches (an integration provision, and elimination period and a split benefit) were instituted to offset duplication by private accident and sickness insurers. The new plans were really “old plans” with changed indemnification schedules.
The recent trends in new Canadian products have been toward cheaper term insurance, which could lead to super selective risk appraisal. The consumerist movement may shortly take a very critical appraisal of the life insurance industry, just as it has delved into the automobile insurance industry resulting in government intervention.
WHAT NEW CANADIAN INSURANCE PROCUDTS
1. In the fall of 1972, the Excelsior Life Insurance Company published the results of its survey of Agents concerning their attitudes of the insurance industry. A mere 1% of those surveyed replied that “lack of products” was a major cause of their agency not doing more life insurance business. Other than the occasional agent requesting a mutation of an existing policy form, it would appear that the Canadian insurance industry has stabilized itself in the area of new product development.
2. By defining new product, one must not include the confusing method of renaming old products so the name coincides with an advertiser’s extravagant plans to “con” the public into spending money on insurance. New products in the past have included family policies, guaranteed insurability benefits, fifth dividend options, variable annuities, variable life and deposit. There have been no such innovations in Canadian products during the past two years, other than the introduction, by companies, of policies which have been available to the public through competition insurance companies previously.
3. This paper, therefore, will not delve into the introduction of so-called “new products” but will concentrate on the old products which are generating the greatest amount of publicity in the insurance industry today in Canada. The first two policy types which come to mind are the variable contracts and the registered retirement savings plans; however, one must also include the mention of deposit tremor modified term, economy linked family income plan and the income averaging annuity contracts.
4. The latter part of this paper will delve into the implications of the revised Unemployment Insurance Act on the Canadian accident and sickness insurance products. The products involved in this area are not “new products” but are old products with new indemnification schedules and rules.
5. Approximately fifty life insurance companies operating in Canada are now offering the variable contract to the public. The majority of these contracts are sold on the promise that they will fight inflation; i.e., the variable contract combines previously known insurance features and certain required guarantees with the publicly appealing opportunity for an inflation offset and growth factor. Generally, the policyholder’s benefits vary according to the performance of a special investment fund, usually consisting of common stocks, but there are those funds that include bonds and mortgages. Prior to variable contracts, the ordinary life participating policy, with its value depending mainly on the life insurance company performance regarding expenses, mortality and investment returns, was the closest plan available to combat the inflationary trend of the Canadian economy.
6. In connection with life insurance, there are five mutations of the variable contract available in Canada. First, there is the form which combines a decreasing term life insurance contract with and investment fund that is predicated to increase in value to exactly counter balance the decrease in life coverage. At maturity, which is frequently age 65, the guaranteed amount of insurance has been reduced to zero and the amount accumulated in the special investment fund becomes payable.
7. A second similar form of contract provides a guaranteed level amount of insurance, payable on death, in addition to the amount accumulated in the special investment fund. As some specified age, again typically age 65, the policy is changed to one providing a guaranteed level amount of insurance for the balance of the policyholder’s lifetime. This new amount of insurance is determined by multiplying the amount in the special investment fund at the age by a factor guaranteed when the contract was originally issued.
8. Under a third and somewhat different form of contract, a minimum death benefit is guaranteed from the inception of the contract. Included in this death benefits is the amount accumulated in the special investment fund; thus, if the latter amount exceeds the amount of the guarantee, the amount in the fund will be paid; whereas, if he amount in the fund is less than the guarantee, the guaranteed amount will be disbursed to the beneficiary.
9. A variation of this third type of contract provides that the guaranteed minimum death benefit will be increased by and appreciation in the special investment fund over the premiums paid into the fund. Both the latter tow types of contracts more often than not provide for a maturity at a specified age, frequently age 65, and for the payment of the amount in the fund or a guaranteed amount if greater at that time.
10. By searching further, one finds another form of contract in this broad category of variable contracts, which provides an initial amount of insurance which is adjusted annually through the application of any growth or decline in the special investment fund over the past year to provide additional or possibly reduced amounts of insurance. This latter form of contract generally provides that some part of the insurance is fully guaranteed and that only the balance will reflect the performance of the special investment fund.
11. Almost all variable contracts have three basic features: benefits on maturity or death may not fall below a pre-determined floor; cash surrender values are provided through out the term of the contract; the amount of cash surrender values is not guaranteed and reflects the fund’s performance; and a policyholder can convert at any time to a fully guaranteed life insurance policy. Purchasing power of the conventional insurance surrender or maturity dollar has eroded to a point where this form of long-term guarantee investment was regarded with skepticism by much of the buying public. Therefore, the public in the past couple of years has been conditioned to expect more from its hard-earned savings dollar. The variable contract has found a ready-made market as well as a generally willing sales force. However, the life insurance companies offering variable contracts have met with variable sales results.
12. On rather large Canadian company, following the agents’ request for an equity linked policy to meet competition, introduced such a policy in the 1972 calendar year. One would have expected to an overwhelming number of applications to be processed by this well known and respected company, especially since various members of the Canadian Life Insurance Association predicted the variable contract would account for over fifty per cent of sales volume in the early seventies. However, the company mentioned has only experienced a sales result of two per cent of its total number of policies sold. The one encouraging item is that the average size ($15,000) of the equity linked plan is greater than its overall average size policy ($12,000).
13. The variable life contract has not exclusively met with such an unenthusiastic response as a sales result. One Canadian company has increased its volume by more than double its 1970 volume and became the fastest growing life insurance company in Canada. The bulk of their sales – ninety per cent – has been in the form of an equity linked policy utilizing a common stock based fund. A fifty per cent increase in sales force has been experienced and the company is truly based on the variable contract. Their plans for the future include selling life insurance and annuity policies whose values are tied to and fluctuate with a fund of real estate investments. Presently, there are problems existing with government authorities concerning the liquidity problem of such a fund, but these may soon be resolved. Real estate is the one commodity that we cannot artificially manufacture and as its scarcity increases its value increases. A property-linked fund should prove to be popular, since most Canadians are constantly aware of the rapidly increasing value of real estate and realize it is the safest investment, barring a general depression.
14. Other sales results from Canadian companies show results which are almost invariably below the Canadian Life Insurance Association members’ predictions, and the agency demand for the variable contract has currently stagnated. Companies who are actively soliciting sales of the variable contracts are obtaining reasonable sales results. On the other hand, the companies that merely added the contract to placate agency demands are not truly encouraging abundant ales results. This possibly reflects back to my opening remark that only one per cent of the agents surveyed felt that the lack of new products was a reason for fewer life sales.
REGISTERED RETIREMENT SAVINGS PLANS
15. Life insurance as a form of savings has stagnated during the period 1962 to 1972. A decade ago, almost one-half of a Canadian’s personal savings went into life insurance policies; whereas, today the figure is approximately one-fifth of his savings. In fact, government issued Canadian Savings Bonds have overtaken life insurance savings. Thanks to recent tax legislation changes, which allow the Canadian taxpayer to deduct up to $4,000 if self-employed (or $2,500 if not self-employed) from his taxable income if the money is used for retirement savings, there has been an influx of savings dollars back into life insurance. The taxpayer is always looking for ways and means to pay fewer dollars to the Taxation Department. Insurance companies, as well as trust companies and the like, are now advertising the availability of their own registered retirement savings plans. These plans are tax shelters which allow the purchaser to invest gross interest and gross capital gains before taxation. The buyer may even borrow money to buy the plan, with the added bonus that the interest on the borrowed funds is also tax deductible.
16. In 1972 the dollar value of the registered retirement savings plan deductions was $320,000,000, which represents an increase of forty-two per cent over the 1971 dollar in those taking advantage of the deductions – representing 248,719 Canadians. As an example of the tax savings, a self-employed taxpayer earning $20,000 per year could save $1,698 in taxes by diverting $4,000 of his income into a registered retirement savings plan.
17. It must be stressed that this is not a new product, but it is a new incentive to the buying public to purchase old life insurance products (provided the product matures by the owner’s seventy-first birthday) such as endowments, annuities, and some of the variable life contracts. The outlook for an ever-increasing volume of business is this area is very good, provided the Canadian government does not reduce this tax deduction.
18. The registered retirement savings plans, offered by Canadian insurance companies, produce a soaring premium income, excellent low lapse ratio and do not allow the applicant-owner to borrow any portion of the funds value. The direct result is an abnormally high cash flow into the life insurance industry. Thus, the larger insurance companies are evolving into the real estate development industry in order to obtain adequate returns on their large capital resources. By financially supporting a total residential, industrial or commercial venture from the land acquisition through to the leasing to tenants, larger insurance companies experience yields on their investment of 8% or higher, while taking advantage of the cash flow. The financing of existing real estate, producing less than a 7% yield, is therefore left to the European financial centers.
19. A second side effect of the registered retirement savings plans is their stabilizing effect on the Toronto Stock Exchange. The laws stipulate 90% of these registered funds be invested in Canadian securities. This, therefore, constantly provides a reliable flow of capital into the Toronto Stock Exchange moderating the periods of “bear” markets which are more evident on the New York Stock Exchange.
20. Recently, the Canadian insurance industry has seen the introduction of plans, not really new plans, which are provided to meet the current trend in the industry. One plan is meant to take advantage of the changes in income tax legislation which provides for further tax shelter. The second plan has been introduced to combat inflation. The third plan is meant to combat the persistency problem with life insurance contracts and especially term contracts.
INCOME AVERAGING ANNUITIES
21. With the introduction of the revised Income Tax in Canada in January 1972, the insurance industry found a ready-made incentive to the buying public to buy income averaging annuities. The applicant must buy the income averaging annuity within the taxation year or within sixty days of the year-end. The buyer can then deduct from his taxable income the lesser of the actual amount paid for his income averaging annuity and the amount of his income which qualifies under the Income Tax Act minus the sum equal to one year of payments. This Act is quite appropriate in areas where an individual may receive a large sum of money as income in any one taxation year which he may not anticipate receiving in future years.
22. There are various areas where the income averaging annuity would be very appropriate, and they include:
(1) Any payment out of the superannuation or pension fund can be transferred into an income averaging annuity unless there is some provision in the fund or legislation that does not permit it
(2) Payment upon retirement in recognition of long service, can be tax sheltered in an income averaging annuity.
(3) Single payment from an employee’s profit sharing plan, in satisfaction of his rights under the plan, can be transferred to an income averaging annuity.
(4) The new Income Tax Annuity provides for a number of new interesting opportunities for transferring funds such as deferred profit sharing plans which can be withdrawn to an income averaging annuity.
(5) If an employee’s pension is amended and a lump sum becomes payable to him even though he continues to be a member, he can transfer the payment to an income averaging annuity.
(6) The payment from an employer or former employer in respect of loss of employment (i.e., severance pay), if paid in the year of retirement or the following year, can also be tax sheltered.
(7) A return of premiums received from a registered retirement savings plan on the death of an annuitant can be transferred to an income averaging annuity.
(8) Net taxable gains are also transferable into an income averaging annuity. Also, incomes from production of a literary, dramatic, musical or artistic work or income from activities as an athlete, musician or public entertainer can also be “averaged” to cut taxes.
23. The annuity in question must be purchased from a “person” licensed or authorized to carry on an annuity business in Canada, which means a life insurance company. The income averaging annuity can be an annuity certain for a fixed period of up to fifteen years – it can also be a life annuity with up to fifteen years guaranteed. However, in neither case may the guarantee period go beyond age 85, nor may the benefits start later than ten months after the purchase of the annuity. The income must be level for as long as the annuity is payable.
24. Even though the individuals affected by such annuity plans are in the minority in Canada, there is indeed a market for this type of plan and it has been predicted that there will be sales of approximately ten to twelve million dollars in premium in the next couple of years from this plan. One company to date has experienced about two million dollars of sales in its first year, which is, in their opinion, a very good sales result.
INFLATION AND FAMILY PLANS
25. Inflation problems were mentioned earlier in connection with the variable contracts, and how variable contracts were aimed at fighting inflation. One Canadian company has recently introduced and inflation linked family income plan which allows for the benefit payable to be linked to the cost of living. The death benefits payable increase yearly according to the rise in the cost of living, with the provision that the increase is no more than twenty per cent in one year and a guaranteed minimum increase of four per cent in any one year. The plan is convertible at any time for the amount of the increased value, which depends again on the economic inflation factor. To date, the sales results of this plan have not been as good as expected and no real trend can be foreseen at the present time, even though the plan should appeal to those people worried about the purchasing power of their savings dollar in the future.
26. Although the problem of persistency in Canada has shown a decrease in the past couple of years – decreasing from a fifteen point one per cent lapse rate in mid 1971 to a thirteen per cent lapse rate by the end of 1972 – it is still a major insurance problem. One product, aimed at eliminating the financial strain of lapses, has just recently been marketed by a couple of insurers in Canada. This is the deposit term type of policy.
27. The company that has experienced the best sales result with this plan sells a modified term plan on the basis of a ten year renewable term, with a deposit that varies by age (example, at age 20 the deposit is $5.50 per mil and age 60 the deposit is $16.96 per mil). With the deposit term, this company has experienced a very low lapse rate of two per cent and its sales are now forty per cent of its total business. Since no portion of the deposit is returnable at time of lapse, the company feels that it has more than covered its first year expenses and thus does not have to worry about early persistency problems. The commissions to agents are 100 per cent in the first year with nil commissions on renewal, and the commission is based on the regular term premium, not on the combined regular premium plus deposit.
28. We possibly will see in the future more companies selling this plan in order to combat a persistency problem on term business.
ACCIDENT AND SICKNESS INSURANCE
29. On June 23rd, 1971, the Canadian federal government passed, in parliament, a new Unemployment Insurance act which affected the insurance market by making insurers, issuing accident and sickness policies, adapt “old plans” to a “new market”. Again, we did not see a rash of new products, merely a rash of policy changes. Surprisingly enough, most insurers left the necessary changes to the last possible moment; most changes not being introduced until well into the 1972 year when the Unemployment Insurance Act was in full momentum and ready to start on July 1st, 1972.
30. Significant sections of the new Act as they affect insurers were:
(a) Universal coverage was enforced; thus employees not self employed were not included. It has brought into the scheme some one million more employees previously excluded due to their salaries (earning more that $7,800 per year.)
(b) The new act provides benefits after eight weeks of insurable employment in the past fifty-two weeks, making it closer to insurance company practices.
(c) Contributions are scaled to earnings while benefits are expressed as a percentage of earnings; benefits are more related to protecting a person’s standard of living and adjust automatically with that standard.
(d) Sickness and pregnancy were added as valid reasons to draw benefits under the Unemployment Insurance Scheme.
(e) The new Act takes the position of “second payer” only with regards to group policies and not to individual policies which are bought personally by he claimant.
31. The insurance industry countered that major changes would not be required to be introduced with the coming into effect of the Unemployment Insurance Act, and that coverage would retain the flexibility that has always been characteristic of individual policies providing income replacement benefits. One such insurer stated: “ Our underwriting practices considers the Unemployment Insurance Act benefits to be like any other existing coverage and we try to ensure that any benefits offered by our company do not allow for unnecessary or duplicate coverage.”
32. Generally, three approaches: an integration provision, and elimination period, and a split benefit were instituted to offset possible duplication and the problem of over-insurance. The integration provision approach controls the amount the insured will receive, or the insurer will pay, when the insured is concurrently entitled to receive Unemployment Insurance benefits. The provision would reduce the monthly benefit of the policy, not the government benefits. Unfortunately, the reliance on this provision alone results in poor sales results and/or policy owner dissatisfaction and heavy lapses. The insured prefers to know that he will receive the full benefits paid for and expected, regardless of what the agent told him at the time of the sale.
33. The elimination period approach, commonly a one hundred and twenty day elimination period, is a second method of combating the over insurance problem in the early stages of benefit. However, as one must qualify by twenty weeks’ contributions under the Unemployment Insurance Act for entitlement to its cash benefits, it is quite possible that a policy owner may not indeed qualify; thus, one could be left with a loss of earnings and no adequate replacement for the one hundred and twenty day elimination period. We also have the factor that Unemployment Sickness benefits can be deferred until payments under a registered group of sickness plan are exhausted, thus leaving the insured over-insured for a possible one hundred and twenty day period. Many companies have been endeavoring to sell this approach. Proposed insureds, realizing the delays encountered with dealing with a government agency and being unfamiliar with the available Unemployment Insurance Sickness benefits, have, however, been rather reluctant to purchase a plan that does not benefit them for one hundred and twenty days.
34. The third approach, split benefits, has been in use by some companies for some time. The Unemployment Insurance benefit is taxable income; this, insurers are issuing policies with modest benefits for the first seventeen weeks and then for the full qualifying amount thereafter continuing for the balance covered benefit period. Again, sales on this type of plan are hard to make, since the agent is faced with a communication problem. The buyer still prefers to know that if he is purchasing a benefit he is purchasing the full benefit and not twenty five per cent now and the balance after seventeen weeks.
35. Various combinations of these approaches (i.e., the integration approach in conjunction with the split benefit approach) are being used, but all it appears to be doing is confusing the consumer, and not encouraging good sales results.
36. A self-employed individual is purchasing more and more accident and sickness insurance on the conventional plans available. This market is relatively unaffected by the Unemployment Insurance Act, and thus not burdened with further confusing approaches concerning the how’s and when’s of paying benefits. Further inducement to the professional, self-employed market is the recent introduction of the return of premium on disability income policies. The policy generally provides for the return of the three-quarters of the paid in premiums with the insured paying about forty per cent extra in order to provide for this benefit. Those consumers, who had previously believed they were better off self-insuring themselves against loss of revenue, are now purchasing a plan that “always” gives them something back.
37. Since the Canadian life insurance industry has no new legitimate “new products”, one would find it hard to summarize the trends of “new products”. Instead, possibly the above comments on life and accident and sickness insurance shows that the recent trend has been more centered on the marketing of old products to produce greater sales results. There have also been various other forms of marketing to increase sales results, and they included sales through catalogue order forms, mass merchandising, amongst other “gimmick” type of solicitation. The products offered are not new but they do, however, fill the need for a market that has been virtually left to stagnate. Since the amount of insurance that this market is seeking generally produces a small commission, it does not attract the agent to a possible sale. Thus, by a direct mail or mass merchandising approach, this market is beginning to be solicited once again, but not by the professional sales force, rather through a mail order type business.
38. There is a definite trend, recently, to counter the increasing competition to sell “cheap” term by decreasing to the lowest, and possibly below, the rates charged to the consumer. These old plans with their new bargain basement rates cannot withstand the usual expected mortality losses that are based on the insured being given a standard premium when his individually assessed mortality falls somewhere between eighty per cent and one hundred and thirty per cent of normal. As a result, these new rates will warrant acceptance of only those lives that are assessed at one per cent mortality or better, excluding literally millions in the one hundred and one per cent to one hundred and thirty per cent category presently obtaining standard rates. This latter group must reapply on a different plan which has the conventional rate structure.
39. If this trend for new product rates continues, it could lead to rates on certain products for those who show a more and more finite mortality; i.e., ninety-one to ninety-two percent, ninety-three to ninety-four per cent, ninety-four to ninety-five per cent, … one hundred and twenty eight to one hundred and twenty-nine per cent,… If this happens, the Canadian insurance industry will, by such a pricing structure, be offering rate classifications similar to automobile insurance rates. A super standard life risk will be paying a lower premium, just as the good driver with merit “discount” pays less for automobile coverage. The average standard life risk, if there is such an animal, will be paying the conventional rate, just as the average (one accident every couple of years) driver pays. The just substandard, or borderline standard life, will pay more in premiums, similar to the poor driver. The average driver’s rates are now going up at a phenomenal rate, coinciding with the poor driver’s experience and rates; only the good drivers are stabilizing. It seems bound to hold true for the life insurance rates if the trend continues for a “cheap” rate structure.
40. The public is now demanding that the individual provincial governments investigate the automobile insurance industry and it has resulted so far in three out of ten provinces now providing a basic automobile coverage and excluding all private enterprise for the driving public. It will not take the various consumers’ associations long to realize that the life insurance industry may require a very similar attack on its practices if the above-noted trend continues.
41. Competition is generally very susceptible in our society, but when the competition adversely affects the status quo of the purchasing public, it is unnecessary and unwarranted. Hopefully, the industry will not bow to agent demands for lower rates for much longer, but will find a better and more equitable method to supply the necessary competitive edge.
42. Mr. William MacFarlane, in his article entitled “Consumers – no longer a Non-word” in the National Underwriter of January 8, 1972, stated that “ The Life insurance industry today, unlike its counter parting the Property and Liability field, has been the happy victims of virtually complete neglect as far as a consumerism movement is concerned. The sleepy giant has been nudged on occasion, prodded on others, has rolled over and yawned, and then evidently brushed off its detractors and unspectacularly gone back to doing business in the same old way and at the same old stand.”
43. As stated at the very beginning of my talk, new products are not really what the life insurance industry needs. With the rise of consumerism and the consumerist and related groups, the life insurance industry can expect to undergo a scrutiny as never before encountered. Developing new products just to please a minority group is not what is required. The life insurance industry should take a look at the products it now sells and possibly offer even fewer policy types in the future. There should be a tendency in the future to drop all the various and overly confusing policy names as well as making the policies much simpler for the average insured.