Term Life Insurance Continues to get Cheaper in Canada

October 3rd, 2011 | Author: Mitch Reynolds

Pricing Wars for Term Life Insurance Continue in Canada

Term Life Insurance in Canada is cheaper, but at what cost to consumers?

Cheap term life insurance in Canada It has been over a decade now that Canadian life insurance companies have been battling over the term life insurance market. Prices have steadily come down over these years as life insurance brokers have been able to price compare different life insurance companies’ offerings for clients. Low cost life insurance is a good thing for Canadians, but we should all be careful to remember price isn’t everything.

One of the first major problems with term life insurance prices dropping is the fluctuation in business flow from one life insurance company to another. An efficient market for life insurance would mean that each life insurance company has captured a certain percentage of the Canadian term life sales and is comfortable servicing this size market. When aggressive term life insurance re-pricing brings one company’s prices well below their competition, a majority of the life insurance brokers across Canada will begin putting their business through that company. This is what happened to RBC Insurance recently when they reduced their term life insurance prices to be the lowest in Canada for many target age groups of clients. The flood of business that went to RBC Insurance was huge, and they were not prepared to handle the increased case load. A company like RBC Insurance, which is Canada’s largest bank owned Life Insurance Company, is still only about the 8^th or 9^th largest life insurance company in Canada. It could not efficiently handle the massive intake of new term life insurance business. This meant long wait times to get policies underwritten, lower levels of customer service, unhappy customers and frustrated brokers.

Sometimes price isn’t everything. Trust, dependability, and a good relationship mean a lot more when dealing with a life insurance company (for brokers) or an insurance advisor (for clients).

Reinsuring term life insurance can move prices lower

One of the reasons life insurance rates continue to drop is because Canadian life insurance companies have been selling off their risk portfolios to international reinsurance companies. These giant companies deal directly with local life insurance companies in Canada, offering to buy up large amounts of their book of financial risk for less than the premiums the Canadian life insurance company gets from their clients. For example, a reinsurance company goes to RBC Insurance and says they will buy up the their term life insurance business for $0.85 for every dollar RBC Insurance gets in premiums. This means RBC Insurance is no longer liable to pay the claim (the reinsurance company will pay claims since they bought the business) and RBC Insurance can now pocket $0.15 of every dollar paid to them in premiums as pure profit.

So, how do reinsurance companies make a profit is they get less money for the life insurance risk they buy? There are a couple of things happening. Firstly, there are the mathematical laws of large numbers. These reinsurance companies are huge and have millions and millions of people from all over the world insured through them. The large numbers of insured people mean the statistical risks from any one group (like Canadian clients from RBC Insurance) go down. Reinsurance companies can make money because they very accurately calculate the total claims expected versus the premiums coming in. The larger your group, the more accurate you can calculate these numbers. Even a serious natural disaster or terrorist event, like 9/11, is only a minor blip on a reinsurance companies claims rates for the year.

Secondly, and more importantly for Canadians, is that reinsurance company’s hold a great deal of power over their Canadian life insurance company partners. In order to “accept” the life insurance risk portfolio that a Canadian life insurance company is selling, they require more detailed investigations into clients’ health records and more tests of blood and urine samples. The outcomes for this increased amount of underwriting to get life insurance have resulted in the following:

Term life insurance is harder to get than ever before

It has become harder and harder to actually qualify for life insurance, especially term life insurance. Reinsurance companies want to reduce their overall risk portfolio, and so by increasing medical investigations they can weed out the undesirable candidates for term life insurance. Term life insurance is a specialized risk class for life insurance companies. The premiums are very low (never been cheaper in Canada than today) but the financial risks to the insurance company are high. If a Canadian life insurance company or a reinsurance company can reduce its overall risk portfolio on a product line they will make more profit because the group they have left is less likely to die during the term number of years they carry their life insurance policy.

What we have seen as brokers in the life insurance business is:

more detailed underwriting questions uncovering every possible health condition
a higher likelihood that a full blood and urine analysis will be done on our clients
more paramedical exams and telephone investigations being ordered
greater focus on mental and nervous disorders when considering life insurance risks
a doctor’s medical report will be ordered to investigate even minor conditions that are reported
more focus on foreign travel and not insuring Canadians travelling outside of Western countries or tourist areas

Preferred rates less likely and rated policies more common on term life insurance

In the past, when term life insurance premiums were higher, the life insurance companies could afford to absorb a bit more risk and even offer preferred or discount rates for borderline cases. This is no longer the case. A life insurance company, held captive to its reinsurance agreements, must increase term life insurance premiums by a minimum of 50% extra when clients have even minor risks. I have even seen a case of minor irritable bowel syndrome (IBS) where my client only took medication occasionally during flare-ups (which was once or twice per year) get a plus 75% rating. Otherwise this client was very fit and a competitive athlete.

The flip side of getting rated (paying a percentage extra above the standard rates) is qualifying for preferred rates. It was fairly common that about 35% of Canadians in the past could qualify for preferred rates. A preferred rate usually means about 10% to 30% discount on your annual or monthly insurance premiums based on your good health. With the inclusion of family history questions and your driving record, preferred rates do not depend only on your good health anymore. It also depends on your immediate family’s good health and your good behaviour behind the wheel.

Term life insurance is still a great risk management policy, but you have to plan ahead

Having said all this negative information, there is still a lot of good that has come out of the pricing war for term life insurance in Canada. Term rates are lower today than ever before. If you are in good health you might qualify for preferred underwriting, locking in an even cheaper term life policy for many years to come. Even if you can’t qualify for preferred rates, and are offered a standard term life insurance policy, it is still cheaper than a preferred policy of ten years ago. The big lesson is to be proactive with your life insurance plans. Do not delay buying life insurance today, otherwise your health might change, your driving history could get worse or even your immediate family could get sick. All these events could limit your options when trying to buy term life insurance.

Feel free to contact Life Guard Insurance today to get a quote for term life insurance and to find out if you will qualify for coverage. We look forward to helping you secure good family risk protection with a term life insurance policy.

The article was written by +Mitch Reynolds. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about Term Life Insurance would be very much appreciated.

Posted in Insurance Companies, Life Insurance, RBC Insurance, Term Insurance

Mitch Reynolds:

December 16, 2011 at 9:49 am

Hi Joel,
You make a great point – sovereign debt should be secure debt for investors to buy and create stable balance sheets. This is another reason why the Euro debt crisis is such a big deal. That being said, let’s step back a minute and look at these reinsurance companies (I am no expert in reinsurance company analysis, mind you). They are VERY big. So much co that the events of 9/11 did not adjust their claims payout projections even 1%. Their risk exposure is global. They usually share risk with local life insurance companies, like our here in Canada. In order to have policies reinsured the life insurance company locally must conduct stricter underwriting and accept high quality risk.

All this put together makes the reinsurance business very profitable. As domestic insurers, like Manulife and Sun Life, have been trying to build up their investment business offering more seg funds and things like GMWBs they have been hit hard by the economic crisis. The major losses for Manulife were based solely on the guarantees offered on their investment accounts, like GMWBs and Variable Annuities. While this has happened, the reinsurance companies, who are scooping up the lions share of yours and my monthly premiums for our life insurance, have been posting HUGE profits. There is good money to be made in insuring risk – even if the business is not as sexy as the investment side.

So, reinsurance companies are very profitable, and their massive diversification of risk reduces their single or event national exposure. We are all concerned that a recession in Europe doesn’t start and the whole house of cards comes tumbling down. That could be an issue because of its immense scope. I do thin these companies have the ability to absorb even that amount of risk and losses on their debts, but it would really hurt them and probably change the course of the insurance industry globally.

Anyway, those are my thoughts – thanks for the great question.
Mitch Reynolds

Joel:

December 16, 2011 at 8:45 am

Good Article Mitch,

In regard to the role of the reinsurance company and pricing on Term Life products, how problematic will it be for insurance companies to place business should this European Sovereign Debt Crisis impact credit levels of the major re’s, such as Munich or Swiss? I’d imagine if any reinsurance company had a significant exposure to bad government bonds, this could either make the market unbelievably tight or we could find escalating term premiums sooner rather than later.

What are your thoughts?

Thanks for the article and the very informative website!

Joel

Mitch Reynolds:

December 16, 2011 at 9:49 am

Hi Joel,
You make a great point – sovereign debt should be secure debt for investors to buy and create stable balance sheets. This is another reason why the Euro debt crisis is such a big deal. That being said, let’s step back a minute and look at these reinsurance companies (I am no expert in reinsurance company analysis, mind you). They are VERY big. So much co that the events of 9/11 did not adjust their claims payout projections even 1%. Their risk exposure is global. They usually share risk with local life insurance companies, like our here in Canada. In order to have policies reinsured the life insurance company locally must conduct stricter underwriting and accept high quality risk.

All this put together makes the reinsurance business very profitable. As domestic insurers, like Manulife and Sun Life, have been trying to build up their investment business offering more seg funds and things like GMWBs they have been hit hard by the economic crisis. The major losses for Manulife were based solely on the guarantees offered on their investment accounts, like GMWBs and Variable Annuities. While this has happened, the reinsurance companies, who are scooping up the lions share of yours and my monthly premiums for our life insurance, have been posting HUGE profits. There is good money to be made in insuring risk – even if the business is not as sexy as the investment side.

So, reinsurance companies are very profitable, and their massive diversification of risk reduces their single or event national exposure. We are all concerned that a recession in Europe doesn’t start and the whole house of cards comes tumbling down. That could be an issue because of its immense scope. I do thin these companies have the ability to absorb even that amount of risk and losses on their debts, but it would really hurt them and probably change the course of the insurance industry globally.

Anyway, those are my thoughts – thanks for the great question.
Mitch Reynolds