Guaranteed fixed level cost life insurance rates are going up, a fact that is frustrating to many. The financial marketplace is evolving – an unavoidable occurrence in nature and business. There are three points to consider when dissecting why fixed level cost insurance rates are going up. 1. Bond yields are barely keeping up with inflation, if at all. Life insurance companies are highly regulated institutions, far more so than chartered banks. These regulations that are mandated by the Office of the Superintendent of Financial Institutions (OFSI) are good for the long term stability of the insurance industry as evidenced by the claims paying ability of Canada’s life insurers, which is among the best in the world. These regulations also require that the investments be very secure and that’s where Government of Canada Bonds play a key role. For several years now bond yields (the rate of return on a bond) have been very low. At the time of writing this blog the yield on a ten year Canada was 1.67%. Insurance companies need 4% or 5% in order to price stable long term guaranteed insurance rates. 2. Reserving requirements are tightly regulated; subsection 515(1) of the Insurance Companies Act (ICA) requires federally regulated life insurance companies and societies to maintain adequate capital. These reserving requirements known as the Minimum Continuing Capital and Surplus Requirements (MCCSR), originally released in 1992, are reviewed on an ongoing basis by OFSI. OSFI will consider whether changes are required to improve risk measures, address emerging issues and encourage improved risk management. 3. High levels of uncertainty in the marketplace. Volatility in the worlds markets and low consumer confidence translates into a much more difficult task of projecting or predicting the eventual outcomes. When an insurance company plans to guarantee a fixed premium for 30, 40 or possibly 50 years then stability and uncertainty become critical factors. The pricing of insurance is based on three things: 1. Mortality, which is fairly constant and predictable in Canada; 2. Expenses, which the insurance company has considerable control over; 3. Investment returns, of which lay the problem as guaranteed level cost life insurance may be priced out of the market. Examples of this; Sun Life recently announced that they will no longer sell individual life insurance or variable-rate annuities in the US and Standard Life announced in November that it will discontinue selling new life insurance as of January 2012. An increase in fixed level cost insurance rates are surely just one of the changes we will see in the future. We know change is inevitable, products and practices are constantly evolving, understanding how these changes affect you are critical to making an informed life insurance decision. | Raymond Matt, CFP, CLU, TEP, CHS | The Ontarian, Writer, Editor
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