Govt of Canada - Real Return Bond - Long Term

It is a weird time for Life Insurance company financials. On one hand you have MASSIVE corporate profits

Manulife $1.2 Billion in Q1 2012

Great West Life $451Million in Q1 2012

Sun Life $686 Million in Q1 2012

And yet, insurance companies are all terrified of the current prolonged low interest rate environment.

Manulife just increased their Universal Life and Term 100 rates again, this is the third or fourth time in a year or two. And earlier today RBC Insurance announced that they had just pulled the plug on all of their long term insurance products.

RBC today announced they will suspend sales of:

• RBC Universal Life
• Term 100
• Long Term Care Insurance
• Critical Illness T100
• Critical Illness term 75 paid up at 65
• Critical Illness Return of Premium on surrender riders
• Quantum Disability Insurance

What do these policies all have in common? A long term horizon of age 65, 75 or 100. 

Why are many companies raising their rates or as RBC has just done pull products from shelves?

Simply because with the current low interest rates they can't make a profit on these long term policies.

The way insurance companies finance these long term policies is they buy long bonds, usually 10-30 year maturities. Since these long bonds are paying so little interest (Govt. of Canada Real Return Long Bond is yielding 0.38% as of June 13, 2012) they need to put aside a lot more capital in reserve to pay out future claims. These higher capital reserve requirements mean they either have to increase rates to consumers, or simply say enough is enough and pull the products with long horizons as they simply can't make money off them.

Short term, insurance companies are posting huge profits, long term the future looks shaky especially if interest rates stay low.

*Edit - I also just got a notice from Industrial Alliance Pacific that they too are increasing rate on July 3 2012.
rates are increasing by 3-10% for long term products such as Universal Life, term 100, Term to 65, Critical Illness and otehr similar long term policies. Something interesting to note, the increase for those age 60+ is only about 3% in most cases, if you are under 60 your increases are 7-10%. Why the difference? Well if you are 60+ you are going to die sooner...  

--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.

Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca

E.O. E.