Superintendant Julie Dickson, Office of Superintendant of Financial Institutions Canada confirmed during her delivery of a presentation on the “Challenges in the life insurance industry” on November 8, 2010, the existence of toxic products in the life insurance industry. This comment was made at the 2010 Life Insurance Invitational Forum. She said as an introduction:
“I have attended this conference on several occasions in the past and one that I remember particularly well was in November 2005. There was a session on the history of toxic products in Canada. A reinsurer provided all the gory details. He said that the first major Canadian insurance industry toxic product was “Term to 100”, offered in the 1980s. This product was a great idea at the time, but the problem was that early years’ premiums far exceeded expected claims, and later years premiums were far less than claims.”
But Julie Dickson failed to ask how life insurance companies managed these products. This is not intentional. Her federal role is to ensure the solvency of insurance companies. Commercial practices of life insurance companies fall under provincial jurisdictions and she continued her presentation about how insurance companies’ capital requirements would change in the future to deal with this issue.
How did insurance companies manage those toxic assets?
Julie Dickson made another comment that we have to carefully study.
“The industry had assumed that lapses would be the same as with other products, and they were not – the educated guesses turned out to be horribly wrong and the consumer response was more sophisticated than expected.”
In confirming the existence of the toxic products, Julie Dickson tells us that the amount of the liabilities associated with these toxic products are yet to be determined and will depend on the behavior and sophistication of the consumer response.
Are insurance companies manipulating the sophistication of consumer response?
The sophistication of the consumer response is directly linked to the access to information, access to service and access to an advisor. Is this why insurance companies have adopted and protected a service model that is extremely poor? Is this why all commissions are paid up front? Advisors don’t want to hear these questions but they can’t be ignored.
One strategy of the insurers to reduce access to service is to create orphan policies. (without a licensed servicing advisor), and therefore, through this strategy, they have been able to increase the lapse rates on these toxic products and decrease their financial exposure or liabilities.
I can tell you as an executive of 25 years in the life insurance industry, with the demutualization, many CEO of insurance companies promised their shareholders to deliver returns on equity that were on par with the banks. This could not be achieved if the problem of these toxic products was not resolved through the use of questionable commercial practices.
Orphan policies should not exist based on provincial laws but insurance companies have ignored these laws for 40 years and the regulators have failed to act. If provinces have not the strenght to apply their laws maybe this demonstrates why we need one Superintendant of insurance at the federal level and only one Insurance law accross Canada.
Julie Dickson then said:
“He then talked about segregated fund guarantee risk and the market crash of the early 2000s (the main challenge being predicting the market).”
In other word the insurance industry is again facing toxic products with this time segregated funds. The level of financial exposure faced by life insurance companies in relation to these new toxic products will also depend on the sophistication of consumer response and access to information.
It is unbelievable that current provincial laws specifically exclude the disclosure of the value of segregated funds guarantees to the client prior their transfer to another investment. There are no obligations to inform the clients of what he will be losing. NO DISCLOSURED IS REQUIRED!!!
RICHARD PROTEAU is currently lobbying to change this.