Given the problems encountered by some large financial institutions in the United States, how concerned should we be about the state of the life insurance industry in Canada?
Insurance is one of the most closely regulated industries in Canada. Unlike the United States, in Canada, there is a government organization that supervises all of the federally incorporated and foreign insurers to ensure that these companies operate in a prudent manner. This organization is the Office of the Superintendent of Financial Institutions (OSFI). The major life insurance companies are federally regulated by OSFI (For those companies that are provincially chartered their oversight is provided by the province in which they do business).
Life Insurance companies are decreasing in number
It is a fact that over the past decade the number of life insurance companies operating in Canada has decreased dramatically. This decrease is mainly due to the mergers and acquisitions of the existing companies. For example, those individuals who maintained policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life, now find themselves insured by Manulife Financial.
The good news? No insured individual has ever lost any contractual benefits due to their insurance company being acquired by another.
Adequate reserves are the key to stability
OSFI oversees the stability of life insurance companies by enforcing the requirement that adequate reserves be maintained in order for the companies to meet their future contractual obligations.
Reserves are known as “actuarial liabilities” and each company is required to put money aside and to invest that money prudently so that they may pay future benefits on policies that they have sold in the past.
These reserves are generated from premiums paid to the insurer and the investment income earned on those premiums. Under the Insurance Companies Act, insurers are required to invest in a “reasonable and prudent manner in order to avoid undue risk of loss.”
Also, OSFI requires an amount over and above these reserves, known as the Minimum Continuing Capital and Surplus Requirement (MCCSR) to be maintained by the insurer. OSFI expects that the life insurers maintain an amount equal to 150% of the MCCSR requirement. The MCCSR ratio maintained by member companies of the Canadian Health and Life insurance Association has consistently been significantly higher than the minimum requirement.
More protection for Canadian policyholders
As additional protection afforded a life or health insurance policyholder there are benefits provided to all policyholders through a not-for-profit organization known as Assuris. This organization in a manner similar to the Canadian Deposit Insurance Corporation protects policyholders should their insurance company fail. Assuris guarantees the following:
Death benefits – Up to $200,000 or 85% of the promised face value, whichever is higher;
Critical Illness – Up to $200,000 or 85% of the promised benefit, whichever is higher;
Health expenses (including travel insurance) – $ 60,000 or 85% of the promised benefit, whichever is higher;
Monthly income (disability, annuity etc). – $2,000 or up to 85% of the promised benefit whichever is higher;
Insurance companies TFSA’s – Up to $100,000;
Segregated Funds – $60,000 or up to 85% of the promised guaranteed amount whichever is higher.
So how strong is the Canadian Life Insurance industry?
The combination of strong effective oversight and regulation of prudently invested actuarial liabilities have resulted in a robust financial industry enjoying assets of more than $514 billion in Canada, making the industry one of the largest investors in Canada.
10% of all Canadian and Provincial Government bonds and 15% of all Canadian corporate bonds are held by the insurance industry.
Canadian insurers also hold $650 billion in assets abroad. The industry in Canada employs over 150,000 people.
Even though the life insurance industry in Canada has gone through significant changes in the past decade or two, the industry remains stable and capable of meeting its contractual obligations in the future.