Predictions and Challenges in the Life Insurance Industry. Gerry Bouwers President Western Canada Operations

Transcription

1 Predictions and Challenges in the Life Insurance Industry Gerry Bouwers President Western Canada Operations Cruise, October

2 Agenda Background Reference Material The single greatest challenge facing Life Insurance Industry Industry predictions in 2013 Other industry predictions Two important Megatrends Challenges for Life companies Producers Conclusion 2

3 Background Reference Material Predictions - collective view of 50 U.S. industry leaders LIMRA study Participants are CEOs, Marketing Executives, Investment Executives We will discuss those that apply to Canada Other data Various articles published by LIMRA, Ernst and Young, PwC 3

4 Q: According to life insurance executives what is the top risk for the industry worldwide? The risk of regulators! 4

5 The Single Biggest Challenge The elephant, symbol of our 100 years of strength and longevity. 5

6 The Single Biggest Challenge Low interest rates (70% of respondents agree) Federal reserve expects to keep interest rates at current levels through 2015 Bank of Canada signals indicate low interest rates will be the norm Overnight rate has been 1% for almost 3 years Managing risks of guarantees is critical Capital management 6

7 Long Term Interest Rates The elephant, symbol of our 100 years of strength and longevity. 7

8 Current environment - Canada long term interest rates Dec 31, % Dec 31, % Dec 31, % Dec 31, % Apr 30, % July 31, % Using only interest rates At interest rate of 15.52% we need $3.12 today to fund $1,000 in 40 years At interest rate of 5.69% we need $ today to fund $1,000 in 40 years At interest rate of 2.50% we need $ today to fund $1,000 in 40 years At interest rate of 2.37% we need $ today to fund $1,000 in 40 years 8

9 Asset and liability matching issues Interest rate = 5% years $1,000 No problem for matching asset and policy liability 9

10 Asset and liability matching issues Interest rate = 5% $ years $1,000 Cannot find an asset that has a 60 year term Assume longest term for asset is 30 years Actuary must now use a different interest rate after 30 years for investing the asset that will mature Interest rate used must be based on risk free rates and today would be about 3.2% which is set by CIA formula Asset (backing policy liability) would increase from $53.54 to $89.94 or increase of $

11 Asset and liability matching issues A year later and interest rates have dropped Interest rate = 5% $89.94 $ years $1,000 Long term interest rates continue to drop Calculated risk free rate after 29 years is now 3.0% Asset would increase from $94.44 to $ For a drop of.2% (or 20 basis points) increase in assets is 6% 11

12 Main issues for life companies when interest rates drop Long term interest rate decrease results in: Significant increase on in-force policy liabilities for individual life insurance with long term guarantees Increase in capital requirements Every time long term interest rates decrease the capital requirement increases regardless of the level of premium rate No investments available to match long term interest rate risk 12

13 Products that have significant interest rate risk Long duration, level premium, guaranteed products Liability cash flows are very long and need to reinvest fixed income assets as they mature Need to invest future premiums 13

14 Products with little interest rate risk Guaranteed products with short guaranteed periods Products where there is little build up of policy liabilities Don t need to buy assets YRT products where claims/expenses equal premiums Adjustable products Adjust premiums, face amounts 14

15 Future of product design Products with much less interest rate risk Shorter duration Adjustable Price for the interest rate risk Prices now do not reflect potential future decreases in URR Are we done with premium rate increases? Share risk with consumer Trend 15

16 Industry Predictions 2013 The elephant, symbol of our 100 years of strength and longevity. 16

17 Industry Predictions ) Low interest rates Single greatest challenge in ) Capital deployment 3) Repricing and redesign of Universal Life products 4) Companies will continue de-risking Managing the risks of product guarantees 5) Strategic Alliances with insurance industry and non- traditional industry participants will continue 17

18 Industry Predictions ) Leveraging health insurance exchanges As distribution channels 7) Compensation regulation will remain unchanged 8) The SEC and Uniform Fiduciary Standard 9) Impact of technology on life insurance sales 10) Investment from outside the Industry 18

19 Industry Predictions ) Capital Deployment (59% agree) Most companies will sit on capital waiting for things to change Shore up reserves Acquire other companies or blocks of business 19

20 Industry Predictions ) Reprice / Redesign UL (73% agree) 10 years from now will companies be happy about the business put on the books today? Companies have already made several pricing changes in the last 2-3 years Shift risk to consumer 20

21 Industry Predictions ) Continue de-risking (48% agree) To reduce capital volatility Reduce volatility of earnings due to fluctuations in Interest rates Stock market changes One way of de-risking is to withdraw product guarantees Dynamic hedging programs 21

22 Industry Predictions ) Compensation regulation will remain unchanged (59% agree) Around the world many regulators feel commission compensation is bad for consumers U.K. Retail Distribution rules Effective January 2013, ban commissions except on term insurance Advice available on a fee-only basis Australia Commissions no longer allowed on insurance within retirement plans 22

23 Industry Predictions ) Impact of technology on life insurance sales (68% agree) Over the next 5 years Mobile technology will have bigger impact on life insurance sales than Social Media In Asia, companies are skipping the laptop and using mobile technology 23

24 Other Predictions Demise of gender discrimination in European insurance Genetic testing Consolidation of distribution continues End game? International Financial Reporting Standards II (IFRS II) June 2013 draft confirms the non-viability of products with long term guarantees 24

25 Two important Megatrends The elephant, symbol of our 100 years of strength and longevity. 25

26 Megatrend 1 Large Scale Demographic Shift The elephant, symbol of our 100 years of strength and longevity. 26

27 Growth in Population in Canada from 2012 to 2021 Total Ages 0-34 Ages Ages 55+ Low 6.6% 0% -2.2% 26.6% Medium 10.1% 5.3% 0% 28.2% High 13.6% 10.9% 2.3% 29.8% Source: Statistics Canada, CANSIM, Table and Table

28 Large Scale Demographic Shifts Some concerning numbers Under medium growth assumptions Population under 35 will increase by 5.3% (from million to million) Population 35 to 54 will not grow (from million to million) Canada s population aged 55 and over will grow 28.2% by 2021 (from 9.68 million to million) Canada s population aged 65 and over will grow 36.7% by 2021 (from million to million) It means that in 9 years 1.61 million additional (along with existing) people will have the burden of supporting health care on an additional 1.91 million retirees 28

29 Future of Health Care system in Canada 2013 study on Sustainability of Canadian Health Care System and Impact of 2014 revision to the Canada Health Transfer Sponsored by Canadian Institute of Actuaries and Society of Actuaries Prepared by Stephane Levert Summary In order to safeguard the sustainability of the health care system, Canada has to: Significantly limit health care cost increases or Boost GDP growth or Raise taxes/fees or Substantially reduce or cut altogether other government programs/services or Implement some combination of above 29

30 Large Scale Demographic Shifts Future of insurance market growth at ends of the age spectrum Two cohorts have different needs and buying preferences Baby boomers have immediate need for financial planning and retirement income advice Face to face Younger generation want basic protection and savings Generation C are those born after 1990 and are online most of the day. C stands for connect, communicate and change 30

31 Megatrend 2 Digital Revolution The elephant, symbol of our 100 years of strength and longevity. 31

32 32 Digital Revolution - Then

33 33 Digital Revolution - Now

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35 Let s look at the future of the automotive industry Quote from President of global telecommunications company: When we look at the car we see another smartphone 35

36 Digital Revolution We hope to rewire the way people spread and consume information We think a more open and connected world will help create a stronger economy with more authentic businesses that build better products and services. Mark Zuckerberg, Founder / CEO Facebook letter to potential shareholders, May

37 Digital Revolution Global Mobile User Growth 37

38 Digital Revolution Considering all technologies 9 in 10 experts predict mobile technology will have considerable to extreme impact on the life insurance industry in the next 5 years Life companies and producers will both have to develop strategies to deal with the changes that are coming Mobile applications in North America and Europe will grow more than 40% this year There are 6.1 billion mobile phone subscriptions in the world as of Dec 31, 2011 Improvement in technology will be rapid e.g. Bendable portable devices on the horizon Access for everyone anytime, anywhere 38

39 Challenges for Life Companies The elephant, symbol of our 100 years of strength and longevity. 41

40 Challenges for Life Companies Demographic Shift Companies will need to determine their primary market Self-assessment of operational strengths Which end of the age spectrum? If life companies focus on 55+ market Avoid miscues of the past missing out of rising accumulation market mostly seized by banks and mutual fund industry Competition from banks and wealth management firms Well positioned in 55+ market At cutting edge of technology 42

41 Challenges for Life Companies Demographic Shift Advisory model Personalized service If life companies focus on younger market Need a much more technologically savvy and connected agency force How to friend, like tweet and using and monitoring popular social media channels Need to do more to attract younger clients More online selling What about the adage Life Insurance is sold, not bought? 43

42 Sufficient human resources Challenges for Life Companies Mobile Technology Managing multiple devices Security of information Consistent need to upgrade Driving producers to use mobile technology Training of producers 44

43 Challenges for Life Companies Need to house and manage increasing amounts of data across all technologies 45

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45 Status of Life Company Mobile Initiatives for Producers Planning to launch within 12 months 47 Source: LIMRA 2012: Life companies surveyed in U.S. and Canada

46 Challenges for Producers The elephant, symbol of our 100 years of strength and longevity. 49

47 Challenges for Producers If focus on 55+ market Acquire skills, tools and knowledge to act more like financial planners and investment advisors If focus on younger market Know how to friend, tweet etc. Adopt and develop skills in mobile technology 50

48 Challenges for Producers Use mobile technology tools and solutions to: Nurture personal customer interactions Promote customer service Reduce reliance on paper for presentations and illustrations Develop tactics to integrate social media into your business strategy Ensure that you employ best practices for compliance 51

49 Conclusion The elephant, symbol of our 100 years of strength and longevity. 52

50 Conclusion Means by which Life companies and Producers Engage with prospects and customers Provide advice Sell products Support policyholder relationships will look fundamentally different in 2020 than it does today 53

51 Conclusion Life companies and Producers Must decide which of two primary segments of life insurance buyers to pursue Must finds unique ways to get front of (C generation) clients 54

52 Predictions and Challenges in the Life Insurance Industry Gerry Bouwers President Western Canada Operations Cruise, October