Regulatory pressure. Interest rates. Client risk classifications.
These factors will shape the future of permanent insurance products, said Paul Fryer, vice president of individual business management at Sun Life Financial, at CAILBA’s annual conference in Toronto.
1. Regulatory changes
OFSI’s 2012 regulatory roadmap for insurers signalled shifts in two key areas, Fryer notes.
The first is corporate governance. The regulator’s requiring insurers to be more accountable for risks. “That needs to start at the top with boards of directors and go right through the organization,” says Fryer.
“OSFI is saying to boards, ‘You need to be composed of people who understand the business and know the risks […]. You need to put pressure on management, and management needs to be much more transparent about the risks they’re taking so we don’t have surprises in the future.”
That means more focus on educating senior management and boards “on what’s happening in the guts of the business as we take risks by bringing new products out.”
The second relates to capital. “[OSFI] is proposing to change how we do capital, which is one of the key ingredients when we look at product pricing. OSFI is saying, ‘We’re happy with the capital levels but we’re not sure it’s all in the right places.’ ”
Fryer adds IFRS accounting standards could bring seismic changes to Canada’s product landscape. He’s most concerned about IFRS 4 Phase II, which deals with actuarial liabilities and reserving.
“In Canada, we have a sophisticated reserving methodology that looks at the asset and liability sides of the balance sheet and ties them together. This has allowed for development of products like T100 and Level Cost of Insurance UL. Now you’ve got this international body [that’s] having to set standards for the whole world, and the regime they’re proposing is not friendly to products like T100 and UL.”
He says regulatory developments around capital and reserving could drive up prices. “It could even mean Canada would go the same way as the rest of the world in not having the non-adjustable products like T100, Level Cost of Insurance UL [and] guaranteed premium critical illness insurance that we enjoy today.”
2. Interest rates
Fryer’s an actuary, and that means he extrapolates trends from key data. For instance, people on average are living longer than they used to. It’s reasonable to assume they’ll continue to do so, and make decisions on that basis.
But actuaries hit a wall when it comes to interest rates, says Fryer. Pointing to a graph showing rates over the last 70 years, he says “there’s no line you can draw through a graph like this to inform what might happen in the future, and that’s where you get a lot of challenges in pricing products.”
The last few years have seen significant price increases; though, as Fryer notes, prices have stabilized. But uncertainty about when rates will normalize doesn’t bode well for permanent product pricing.
3. Risk classification
Should insurers be able to ask for genetic testing results when underwriting? Fryer says the industry needs to address that question sensitively and transparently.
He says the debate revolves around equal access to information. If someone voluntarily gets tested, whether out of curiosity or for some other reason, she now has information that may prove material when buying insurance. If she doesn’t reveal it, it puts the insurer at a significant disadvantage.
“Today we ask the question, ‘Have you had medical tests done and did [they] reveal anything [in various] categories?’ What we want is continued access to that information.”
So the industry’s goal, says Fryer, is not to require genetic testing as a precondition to getting insurance; instead, if a potential client had a test done by choice, she should disclose the results if they have any bearing on her insurance application.