Thursday, June 21, 2012

(No.202) "What's been wrong with the life insurance business?"

"What's been wrong with the Canadian life insurance business?

                                  Some views"

by Alastair Rickard

Recently I was called by a journalist interested in some of my views on the Canadian life insurance industry's past, present and future. After that conversation it occurred to me that I might as well share a few with readers of 

What follows is far from comprehensive in terms either of our lengthy conversation or what could be said on the subject. These few points are presented in no particular order.

My views on the life insurance business and about particular life insurance companies have been the subject of numerous columns among the last 200; all can be accessed month by month and year by year via the links to my blog's archive appearing beside this column.


My experience over the years with senior executives in the life insurance companies for which I worked and executives I encountered from other companies was that without genuine agency experience the majority of them knew little and understood less about the reality of the industry's distribution of its core individual products and in particular about the agency system in its various brokerage and career agency forms.

Indeed, some I have known steadfastly resisted acknowledging the fundamental role of 'selling stuff' to the success of the business their companies were in. Some poor decision-making was an inevitable by-product.

Similarly such executives tend to be partial to the convenient but false argument that life insurance is a 'mature market' in Canada. Hence they had to buy other companies in order to grow and/or must now pursue the wealth/investment market. [To paraphrase Sarah Palin, one might ask the current and former CEOs of Manulife, for example: 'How has that wealth product strategy worked out for you?'].

The 'mature market' for individual life insurance in Canada argument has been and is nonsense. It won't withstand close examination based on the industry's own in force and new sales numbers of individual insurance coverage vis-a-vis population data. However the argument has long provided handy camouflage for the results of inferior management.

As the result of years of life insurance company consolidation and market withdrawal the Canadian life insurance industry today offers less choice than it once did. In terms of taking the product to the public and creating meaningful opportunities to buy from a wide range of both Canadian and foreign issuing companies, the past was not prologue. Buyer choices are much reduced compared to what they formerly were in Canada.

Today the business in Canada is dominated by three huge players: Manulife, Power Corp. (embracing the brands Great-West, London, Canada) and Sun Life. They tend to act and think alike much of the time whether, for example, it is in unwisely chasing variable but 'guaranteed return' business or dropping the sale of participating policies as quickly as possible following company demutualization.

Since the demutualizations of big Canadian life insurance companies more than a decade ago (Sun, Manu, Canada and Mutual/Clarica) the interests of millions of policyholders run a distinct second to those of the companies' shareholders. Demutualization, especially for Mutual Life of Canada -- the only one of the quartet founded and operated as anything approximating a real mutual, was both unnecessary and mistaken and not in the interests of its par policyholder owners. Virtually all Mutual Life policyholders had this status, even those with Universal Life policies.

Those who argue that growth through takeover required demutualization and the raising of capital though a share structure are always happy to ignore various inconvenient facts. For example: Mutual Life bought the Canadian operations of both Prudential Assurance and Metropolitan Life before it became a stock company. Also, federal legislation had been changed permitting mutual companies to issue preferred shares. Of course company boards and senior managements were not in the least interested in the use of that device to avoid demutualizing. Mutual company structure simply did not permit the sort of inflated levels and forms of executives' financial reward so easily available after the mutual becomes a stock company.

The current fashion among some life insurance companies and executives seems to be to emphasize that there is 'no money to be made' from life insurance or at least not enough profit. This is codswallop. It carries a patina of credibility only because of the way in which too many companies and their senior executives have been operating for several decades: e.g., giving up reliance on their own proprietary career agency distribution systems in favour of chasing what was erroneously perceived to be cheaper and easier 'brokerage' business, relying on competitiveness based on under-priced and over-compensated life insurance products. Manulife did it; so did Canada and Sun among others.

Sun gave up in the U.S. first on having its own career agency distribution system, replacing it with a PPGA system, the one that Sun's new CEO has just recently -- and wisely -- shut down along with the individual life insurance products it sold.

In Canada Sun Life gradually, through poor management and inferior decision-making, degraded its own career agency distribution system until it was replaced entirely by a brokerage system which ultimately saw Sun's sales and market share decline. Its CEO Donald Stewart had the good sense to acquire the Canadian industry's leading career agency system when it bought Clarica Life, the demutualized Mutual Life of Canada.

There was a rocky period when direction of Sun's Canadian agency distribution system (career and brokerage) was handed to an American who had been involved with Sun's PPGA operation in the U.S. He knew almost nothing worth knowing about Canada or the career agency system. The logic of successfully managing a Mutual Life-style career agency system is at last reasserting itself in Sun's Canadian operation but as the Duke of Wellington said about his victory at Waterloo, it was a near run thing.

In terms of Canadian life insurance profitability, consider this: for a male non-smoker age 42 the cost of insurance declined between 1975 and 2010 by more than 80%. While that period saw the introduction of smoker/non-smoker rates, that pricing change accounted for only a minority of the reduction.

For the most  important reasons for this  sustained industry race to the bottom in policy pricing, one needs to look to factors like companies chasing top line sales volume, to unwise forms of competition for brokerage business. to pursuit of inflated market share and top line sales growth to impress media and analysts -- all of this and more comprising a pattern of activity anchored in the sale of under-priced and over-compensated policies.

This pattern was actually supported financially in part ( and for years and years, at least until fairly recently) by the big international reinsurance companies which fought among themselves a sustained war for market share and whose allowances to policy issuing 'retail' companies were, for some smaller brokerage companies, essentially the key source of their revenue.

Lest the non-industry reader find this steep and financially harmful decline in the cost of life insurance incredible in an industry where one could find (and still can) executives willing at the drop of a hat to piss and moan about insufficient profitability from life insurance, or the reader who may think it may be merely RickardsRead's editorial take on the subject, consider this:

  for 25 years or so the Munich Reinsurance company has conducted a survey of life insurance actuaries in Canada. A critical point is that the survey is anonymous so that the responding actuaries can freely express their opinions. One of the continuing areas the survey has queried involves whether or not the respondents consider life insurance pricing in the industry to be sound. The percentage who think the pricing is right declined for years and in 2001 only 30% believed the price was right for level cost of insurance; by 2010 this was down to 10%.

Recently -- and belatedly -- we have seen announcements by several life insurance companies in Canada about the repricing [upward] of some life insurance policies or the withdrawal of certain policies from sale or even the absenting of the company from the individual life insurance market in this country.

But please spare us the bleating about poor insurance profitability by those who have been running companies and yet cannot or will not price their products to make the appropriate return and instead prefer to pursue pie in the sky by and by -- whether by hiring still more of the consultants who arrive with answers to questions they don't understand, by chasing asset/wealth product sales misunderstood in design and risk, or by fantasizing a level of real profit from non-Canadian operations based to a significant extent (thus far) upon what amounts to little more than a Dickensian outlook: i.e., great expectations.

Over the years I have observed various CEOs and other senior executives who think they are visonary and have discovered, rather like Malcolm Muggeridge rediscovering Jesus, the silver key to unlock the future of distribution of individual life insurance: i.e., direct non-agent sales.

This is based on what is actually a fantasy except for certain speciality life companies and niche products: e.g., burial insurance AKA 'final expenses'; guaranteed issue/non-medical coverage (expensive and inferior); accidental death, the most useless form of coverage around and the industry's own form of lottery ticket; products distributed via 'the incidental sale of insurance' by travel agents, car dealers and other non-professionals). The truth behind this fantasy has been demonstrated over and over again by the marketplace reality of actual buyer-initiated sale of ordinary life insurance.

Ordinary individual life insurance is, as it has long been, a socially significant product but one that most consumers will not take the initiative to buy either at all or in appropriate quantity and type unless they are sought out, the need demonstrated and a sale made. Perhaps the oldest axiom in the business is still the one relevant to the sale of the bulk of individual life insurance: life insurance is not bought it is sold.

Many thousands of words have been written on each of these and many other topics involving mistakes in the life insurance business, words written by many people including me. I will not rehearse further in this particular column any more of mine.




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