Canadian life insurers have never truly recovered from the global financial crisis that struck eight years ago. If they want to make a comeback, they're going to have to start winning over people such as Kamil Ali Rextin.
The 30-year-old digital marketing guru could be a dream customer for any financial institution. He has a master's degree in business, owns a home in Toronto and is now thinking about starting a family with his wife. As the couple contemplate children, Mr. Rextin began looking at buying a life insurance policy to make sure his family will always be taken care of. But after wading through some "dense and opaque" material, he gave up in frustration.
"I don't want to talk to anybody on the phone, I don't want to go in anywhere. I just want to find the information on my own," he says. "Because I feel like if I go and talk to somebody, they're going to try to sell me on something else I don't want to buy." He also worries that he'll miss some fine print that will void his policy, leaving his family with nothing to show for all the effort. So he has abandoned the pursuit.
Mr. Rextin and his generation – technologically savvy consumers with a healthy skepticism about financial salespeople – are less likely to buy life insurance than their parents ever were. And that's just one of a litany of issues facing a business that is a crucial part of many Canadian investors' portfolios, yet has fallen on rough times. The country's Big Three life insurers – Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. – represent nearly $100-billion in stock-market capitalization. Yet, all three are still trading below their precrisis highs. Manulife shares are more than 60 per cent below their peak in 2007.
Historically low interest rates have hammered life insurance companies by eroding their profitability. Low rates and volatile financial markets make it harder to earn returns on investments that are needed to pay claims. At the same time, new kinds of financial technology firms are threatening to make the insurance industry less relevant to younger people who demand simpler and more transparent products.
With no obvious change coming to markets, a strategic shift is under way in the Canadian life-insurance businesses. After years of building their wealth-management arms and expanding in markets such as Asia to drive higher profits, Canada's staid, stumbling lifecos are turning more focus to wringing profits out of the business they're best known for: selling life policies to Canadians.
To regain their appeal, and cut costs, the country's largest life and health insurers are rolling out a string of changes to how they do business. They've loosened restrictions on marijuana use for policy holders, relaxed the requirements for rigorous blood and urine testing, introduced rewards for customers with healthy lifestyles and fitness regimens, built apps that allow customers to manage health concerns and drug prescriptions with their smartphones and cut the time it takes to process a claim.
Finding growth will be a challenge. Canada's life-insurance market is already developed. Canadians own in excess of $2.5-trillion worth of individual life insurance, according to the Canadian Life and Health Insurance Association (CLHIA). That number is even higher when workplace benefits are factored in.
The demographics of some target customers have also undergone a dramatic shift. The next generation of insurance buyers has more student debt, fewer prospects for full-time employment and, compared with their parents, is more likely to delay marriage and put off having kids – key life events that have traditionally spurred insurance purchases.
But with all of this change comes opportunity. Relaxing policies and embracing technological innovation offer the potential to both entice a new wave of customers and significantly cut costs – keys to extracting profits in an era when companies can no longer count on robust returns from fixed-income investments.
Canada's big three life insurers all say they are just getting started.
A struggle against low rates
In early June, Dave Johnston stood before a group of investors at the Fairmont Royal York hotel in Toronto's downtown core.
Projecting a chart onto a screen, the retiring president of Winnipeg-based Great-West's Canadian business described a growing divide that has reshaped his company – and others – in the years since the financial crisis.
Great-West, Canada's largest individual insurer in terms of annual premium sales, had seen profit growth stall in its group and individual insurance businesses. Over the previous half decade, the compound annual growth rate for those units' earnings hovered at just 2.5 and 2.6 per cent, respectively. The wealth management business, on the other hand, was showing a five-year compound annual growth rate of 8.7 per cent.
"Certainly, we've had the headwinds of lower interest rates affecting our individual insurance lines over this period of time," Mr. Johnston explained. "We would not characterize our individual insurance as a high earnings growth opportunity, but very steady."
This hasn't always been the case for the country's biggest insurers. Before the Great Recession, Manulife posted a 22-per-cent compound annual growth rate for earnings in its Canadian individual insurance business over five years. Today, the company is more focused on the growth of its global wealth management operations, which account for half of its pretax earnings, according to calculations done by Peter Routledge, an analyst who covers the sector at National Bank Financial. He says insurance companies with the potential to expand wealth management operations will have a better chance of revenue growth than those solely focused on the life insurance business, sometimes called protection.
"That slow earnings strain is the impact of a disastrous interest rate environment for what I would call the protection business," Mr. Routledge said, adding in a note to clients that "while the balance sheets of the life insurers … have hedged exposure to falling long-term interest rates dramatically in recent years, they have not hedged against a permanently depressed yield curve."
In the aftermath of the financial crisis, central banks around the world took action, cutting interest rates and introducing extraordinary measures in a bid to make borrowing cheaper and restart the global economic engine. But what once seemed a temporary stimulus measure now increasingly looks like a long-term reality. Interest rates have even gone negative in countries such as Japan and Switzerland. In July, the Bank of Canada lowered its forecast for economic growth this year, and rates keep dropping.
Executives at the three largest insurers said low interest rates put pressure on financial results in the most recent quarter. Manulife, which felt the impact most acutely as falling interest rates and volatile equity markets resulted in a $170-million charge against profit in the second quarter, saw flat growth in its Canadian individual insurance business. Chief executive officer Donald Guloien called the core earnings "disappointing."
The struggle against interest rates can can show up in many ways. Among other challenges, low rates can depress earnings, increase the capital that insurance companies need to hold and negatively affect competitiveness. Sun Life's chief actuary Larry Madge said on the company's most recent conference call that rate conditions can even alter consumer behaviour. "Policy holders who have policies that were purchased at higher interest rate environments have value that they couldn't get by going into the market to purchase a new policy today," he said. "So they're wise to hold on to them. And we have seen them do that."
All of this has added to pressure to kick-start revenue.
In the two decades before the Great Recession, life insurers piled up policy sales, with annual purchases more than doubling between 1990 and 2009 to $313-billion, according to figures from the CLHIA. Then growth stalled. In 2014, $318-billion worth of insurance was purchased – a 7.4-per-cent decline from the year earlier.
In 2015, there were small signs of improvement. Early estimates show that Canadians bought about $330-billion of life insurance last year from the nearly 100 businesses that sell policies. More than two-thirds of that was individual insurance purchased by a person or family and the rest was group insurance sold to emp- loyees through companies. Still, sales of both lines have remained relatively flat since 2010, the CLHIA's annual fact book shows.
Slight increases in sales activity can't restore the type of profit growth once returned by robust fixed-income investments.
Consider a life-insurance policy bought a decade ago, with monthly premiums invested in bonds that comfortably yielded 6 per cent. Now, the same premiums only yield about half that. Insurers can raise prices on new policies, but that comes with its own risks.
"If you price it too high, then you're not going to have the sales, because people can't afford it," said Marianne Harrison, CEO of Manulife's Canadian operations. "And that's why we're constantly looking at our products. How can we redo products so that we can bring the price point down from the consumer perspective, but not increase the risk from a shareholder perspective?"
An easier customer experience
Twenty-six-year-old Maria Legault says she has always been attentive to her financial future.
In June, after meeting a broker at a community event, she purchased universal life and critical illness insurance from Sun Life. Youth and good health allowed her to skip the awkward experience of having a nurse come to her house to collect urine and blood.
"My initial impressions have been very favourable," she said of the experience. Her broker told her that her application was one of the fastest he'd ever seen processed.
Insurance companies want more customers such as Ms. Legault – and to acquire them at less cost. That's why they're altering the way they assess, underwrite and communicate with Canadians. They're also expanding their product offerings.
Sun Life and Bank of Montreal made waves in the spring when they revealed changes to their views on marijuana use. Sun Life said clients who use marijuana will no longer be charged the same rates as tobacco smokers. Bank of Montreal ruled that occasional use of the drug – up to two joints a week – would also receive non-smoker rates on new applications.
Other changes to coverage were already surfacing. In April, Manulife became the first in Canada to offer individual life-insurance policies of up to $2-million to those who have tested positive for human immunodeficiency virus (HIV). Weeks later, the insurer reduced the requirements – such as blood and urine testing – usually done for term life insurance policies up to $1-million, a new approach to invasive testing that other companies have also explored.
"One of the important pieces, from my perspective, is the ease of doing business with us. That has typically been one of the biggest pain points that we see from consumers," Ms. Harrison said, recounting the typical lengthy insurance application system: paper forms, telephone interview, nurse visit for blood and urine sample and a waiting period of up to 40 days before approval. "It's a cumbersome process."
When Manulife began to use data analytics that track the usefulness of all these steps a couple of years ago, it found some questions correlated with eventual claims more than others. So, it cut the number of questions on application forms to about 25 from approximately 40 and slashed phone interviews in half. Making customers' lives easier comes with an added benefit to the bottom line.
"Because what the customer wants is simple, quick, electronic – all those things will make our processes more efficient at the same time," Ms. Harrison said. "So, it really is a win-win for shareholder and for customer at the same time."
A new willingness to embrace technological solutions is also helping on the cost-cutting front.
Earlier this year, Manulife brought to Canada a program that offers savings on life insurance premiums to people who can prove they are taking steps to improve their health, by getting vaccinations or going for cancer screenings, for instance. Called Vitality, the program offers a free wearable fitness tracking device and is meant to engage and attract new customers. The company also benefits if people live longer, gaining more time to invest and earn returns.
Sun Life has also introduced predictive models and digital tools that speed the claims process and help advisers sell services to customers when they are most receptive to it, such as the arrival of a new child, marriage or retirement.
"It's not just about making it easier to do business with us, it's about having more connectivity," said Sun Life CEO Dean Connor, adding that the company has many other initiatives under way.
Changes to health insurance technology have also helped to improve the customer experience. Over the past year, Great-West Lifeco Inc. has also overhauled its online claims-submission processes, allowing health insurance customers to file some claims by taking a photo of the bill on their phone, with payments deposited in their bank accounts shortly afterward. Customers like it and it saves money, Mr. Johnston said.
The next generation of customers looks much different than their parents', says Cameron Rose, a licensed life insurance agent with Investors Group Financial Services Inc. in Westbank, B.C. He's 31 years old and about half of his clients are also millennials, or members of Generation Y. Previous generations seemed to have a clearer sense of their finances earlier in life, he said. "A lot of the Gen Yers, they've already started a family, or they already have a house, but it's the first time they've really looked at the full [financial] picture."
Darin Wong, 34, bought term life and critical illness insurance through a broker for himself and his wife in late 2014 – the year their daughter was born. He started out researching online and found that "a minefield in terms of how to get good life insurance products." It should be easier, he says. "If the big companies want to grow their customer base with respect to people like us, then they need to make it easier for us to access their products."
Insurers are fighting for business in a weak economy. In 2016, Canada has generated new jobs at the slowest pace since the Great Recession and household debt levels are near all-time highs. These conditions don't bode well for selling life insurance, which requires customers to pay monthly premiums on a product that they might never use.
And there's a demographics issue. Millennials are simply not hitting major "life events" that typically trigger insurance sales at the same time their parents did. Priced out of home ownership in many of the country's major hubs, they are settling down later.
"If you look at who we serve, trying to get at the younger generation – at the millennials who just don't even want to hear about insurance and really don't understand the importance and the value of insurance," Ms. Harrison said. "They would never put up with this process that used to exist in terms of how to do business with us. They wouldn't understand it. They'd say 'Really, this is how it works?'"
Insurers say they are just getting started.
"You're going to continue to see ever-simpler underwriting rules, ever-simpler application processes for life insurance," Sun Life's Mr. Connor said. "We have to find ways to use other data – not just blood – to do underwriting of life insurance. And try to reduce, significantly, the number of days it takes somebody to buy one of our products in the industry."
Gen Y consumers have been steadily reshaping other industries through their behaviour and buying power. As companies such as Netflix, Uber and Airbnb shake up entire models, insurers have said they are watching out for online insurance sites, mobile apps and even the possibility that Internet giants such as Google and Facebook might delve into financial services.
Mr. Rextin, the digital marketing guru, who lists one of his extra bedrooms on Airbnb, remains unconvinced that life insurers can adapt to provide a better experience. "They have all these buzzwords and jargon on top, it makes it hard to understand what I am buying into," he said. Still, he says he plans to buy insurance eventually. The company that makes it easiest will get his money.