Tuesday, June 26, 2012

(No.203) Life insurers: investment cos. with small insurance depts?


"Life insurance companies: 
are they investment companies with 
small insurance departments just for the sake of appearances?"

by

Alastair Rickard


My column on "What's been wrong with the Canadian life insurance business?" (No. 202, posted June 21, 2012) prompted a number of interesting emails to RickardsRead.com. A few excerpts follow.

One correspondent passed on an article I had not seen from London's Financial Times (June 19). In it the CEO of the Dutch insurer AEGON, Alex Wynaendts, identified a life insurance industry mistake my column did not mention (and there were many I did not mention).

He said that life insurers have boosted their profits by selling complex policies which "created a sense of a lack of credibility" by consumers about the life insurance business. "...Customers need more simple and transparent products ... nobody knows exactly what's going on."

I would agree but it has not been just life insurance consumers who don't understand what's going on. As the experience of Manulife senior management highlights in their chasing of vast amounts of variable but guaranteed product sales, management apparently had trouble understanding the product and financial implications of what they were selling, q.v., the billions of dollars in resulting company losses.

A reinsurance executive responded to the column and my remarks on the role of reinsurance in the mistakes I identified in the Canadian life insurance business [italicized words are mine]:

"Always great to read your blog on the wonders of our life insurance industry and the supreme beings that "run" the enterprises. If only Captain Kirk was at the helm to take us where no one else has gone!

"I agree with all your comments but would add to your reinsurance remarks by saying that for a decade plus insurers have relied, almost to the point of addiction, on the price reinsurers charge [and do so] to the point: are they still [life] insurers? If you are reinsuring 74% of all your life business, are you really an insurer? If you rarely if ever use your your board-approved retention [limit] of millions per life, are you a life insurer or an investment company with a small insurance department for appearances' sake?

"The [big international] reinsurers have made tremendous amounts of profits and grown like McGuinty dandelions in downtown Toronto as they gobble up all the [life insurance] risk you can throw at them because they know you make money at risk taking, be it mortality or morbidity.

"Would there be a pricing actuary out there comfortable with taking real insurance risk if they had to retain up to $5 or $10 million of risk [on a life] like they used to? Like many things in life, if you do not use it you lose it!

"Like you I just wish we had more writers in the press who understood insurance and then maybe the warts that surround us could be exposed.

"The industry is in turmoil: [policy] prices going up, commissions going down, RBC Insurance withdrawing all permanent [life insurance] plans since they cannot make money or afford the reserves ....

He concluded: "You and I knew this had to happen long ago but reality was a hard item to accept [by company managements] when lowering [policy] price was easier, so execs glared ahead into the abyss."

An American, a longtime life insurance MGA in the north-east, emailed to say that the column "is superb. Everyone with a serious interest in the life insurance business, in Canada or the U.S., should read your article. How would you feel about my sending it on to members of some of the study groups that I belong to?"

A Canadian with years of field and executive experience in the agency system reacted with some enthusiasm to the "Mistakes" column. He thought it was "Abso-tively, posi-lutely ACCURATE. The business is killing itself to save the high compensation of the few who run it. I couldn't agree with you more."

In response to the 200th RickardsRead "Media myths & RickardsRead" (column No. 200, posted May 30, 2012) a number of comments were received. For example:

A longtime Canadian career agent wrote to say "Congratulations! I have enjoyed RickardsRead and I am so glad you found this outlet as I missed your Journal [i.e., The Canadian Journal of Life Insurance]. Your comments on the industry are much needed and appreciated by those of us who have suffered under all sorts of misguided changes. ... I look forward to your publications and hope that you have the energy to continue for a long time."

From a distinguished member of the Canadian financial planning community came this comment: "And I still remember the days of 'Dear Dr. Insurance' [ a regular feature in The Canadian Journal of Life Insurance] and the ratings of each [life insurance] company's annual report. All of which makes me glad that you continue to carry the flame."

And finally a former Canadian life insurance company executive was among those who sent "congratulations on publication of number 200 of RickardsRead. Your musings and insights delivered either as part of your input to Mutual Life/Clarica Life/Sun Life leaders or from various editorial platforms ... have consistently provided much needed wisdom. Keep up the good work."

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

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