Why Insurance Rates Are Going Up

Guaranteed fixed level cost life insurance rates are going up, a fact that is frustrating to many.  The financial marketplace is evolving – an unavoidable occurrence in nature and business. There are three points to consider when dissecting why fixed level cost insurance rates are going up. 1. Bond yields are barely keeping up with inflation, if at all. Life insurance companies are highly regulated institutions, far more so than chartered banks.  These regulations that are mandated by the Office of the Superintendent of Financial Institutions (OFSI) are good for the long term stability of the insurance industry as evidenced by the claims paying ability of Canada’s life insurers, which is among the best in the world.  These regulations also require that the investments be very secure and that’s where Government of Canada Bonds play a key role.  For several years now bond yields (the rate of return on a bond) have been very low.  At the time of writing this blog the yield on a ten year Canada was 1.67%.  Insurance companies need 4% or 5% in order to price stable long term guaranteed insurance rates. 2. Reserving requirements are tightly regulated; subsection 515(1) of the Insurance Companies Act (ICA) requires federally regulated life insurance companies and societies to maintain adequate capital.  These reserving requirements known as the Minimum Continuing Capital and Surplus Requirements (MCCSR), originally released in 1992, are reviewed on an ongoing basis by OFSI.  OSFI will consider whether changes are required to improve risk measures, address emerging issues and encourage improved risk management. 3. High levels of uncertainty in the marketplace.  Volatility in the worlds markets and low consumer confidence translates into a much more difficult task of projecting or predicting the eventual outcomes.  When an insurance company plans to guarantee a fixed premium for 30, 40 or possibly 50 years then stability and uncertainty become critical factors.  The pricing of insurance is based on three things: 1. Mortality, which is fairly constant and predictable in Canada; 2. Expenses, which the insurance company has considerable control over; 3. Investment returns, of which lay the problem as guaranteed level cost life insurance may be priced out of the market.  Examples of this; Sun Life recently announced that they will no longer sell individual life insurance or variable-rate annuities in the US and Standard Life announced in November that it will discontinue selling new life insurance as of January 2012. An increase in fixed level cost insurance rates are surely just one of the changes we will see in the future. We know change is inevitable, products and practices are constantly evolving, understanding how these changes affect you are critical to making an informed life insurance decision. | Raymond Matt, CFP, CLU, TEP, CHS | The Ontarian, Writer, Editor


To borrow a few words from Shakespeare’s Hamlet,

To EU, or not to EU, that is the question: Whether ’tis Nobler in the mind to

Suffer the Slings and Arrows of outrageous Fortune,

Or to take Arms against a Sea of troubles,

And by opposing end them…

Note to Britain; you’re either in it or you’re not. In recent weeks German Chancellor Angela Merkel has made a point to remind us that Great Britain is still an important member of the EU.  It’s humorous though that it even needs to be said, because if Britain is so invaluable it should be a given — but maybe considering that less than 70 years ago they were doing their damnedest to obliterate each other it is necessary.  The irony is palpable. Further examples of why EU members may need Merkel’s reassuring words regarding England include the country’s act of unceremoniously walking away from Euro talks in early December 2011 and more recently stating that they will not put money in to a 150 billion euro IMF plan to support failing European economies. I would pose a question; what would have happened if the US had decided in 1941 to walk away from Britain in their time of need (i.e. the whole obliterate thing)?   It took a massive amount of effort to make the Lend – Lease program of 1941 a reality and a success as well as the post-WWII Marshall Plan that put Europe back on its feet.  At the time there were many who were opposed to such plans, but today those two initiatives are recognized as decisive turning points in history, which greatly benefited both North America and Europe. To survive the EU must receive universal support.  This requires the help from one of its biggest members; Britain.   That’s the point of the union isn’t it?  Maybe it’s time for Britain to stop picking and choosing which plans work the best for them and start thinking about what is good for the union and in turn the whole global economy: take arms against a sea of troubles, and by opposing end them. | Raymond Matt, CFP, CLU, TEP, CHS Visit us at our website: www.csiplan.ca


2008 Year of the Black Swan or Not?

In 2008 the house of cards that was global finance began to collapse.  Now in 2011 as world leaders and financial institutions are scrambling to rebuild before too much more damage is done, many of us are looking back and trying to make sense of this event and what it means going forward.  And in that conundrum a question comes to mind.  Was the financial crisis that occurred three years ago a Black Swan event or not? Black Swan Theory defined: The event is a surprise to the observer and has a major impact. After the fact, the event is rationalized by hindsight. If the financial crisis of 2008 occurred by freak accident, or was a series of unpredictable events, with all parties acting in good faith, then yes it could be considered the work of a black swan.  However, if what happened three years ago was not inadvertent we must consider an alternative explanation.  That is, for year’s greed, poor business practices and rating agencies turning a blind eye was the catalyst that brought us to where we are today. To many the scales seem to tip in favour of the latter.  This is apparent as the current battle being fought around the globe is one that pits those who benefit from the status quo against those who don’t. Take for example US President Obama and his push to place democratic politician Richard Cordray as the head of the Consumer Financial Protection Bureau, the recently formed federal agency set up to protect consumers.  Cordray, who according to Obama has “spent his career advocating for middle-class families”, is seen by the left as a populist man with good intentions (something that appears to frighten the right).

But take note, this battle has been fought before.  The 7th President of the United States Andrew Jackson in the 1830s wreaked havoc, arguably out of pure honest intentions, when he paid off the national debt.  This along with other policies designed to stop speculation in part lead to the depression of 1837.  The 26th American President Theodore Roosevelt, a republican social reformer, was a known supporter of the Progressive Era, a movement that aimed to stamp out corrupt political machines.  And again, the 32nd President of the US Franklin Delano Roosevelt had his struggle following the Great Depression when he introduced the New Deal, a plan with a notable tag line: Relief, Recovery and Reform. In the wake of 2008 one thing is clear, black swan event or not, fundamental changes must be made. Regulations and those who enforce them must have teeth.  President Obama will have his work cut out for him, especially in an election year, as he attempts to establish a balance between consumer protection and corporate interests.  He must get back to the very principals that got him elected in the first place “change”.  And for the middle class it means change that has meaning. | Raymond Matt, CFP, CLU, TEP, CHS

History Repeats Itself: Don’t Be Surprised, Be Prepared

This week Canadian banks begin reporting their annual and fourth quarter results which will spark speculation and fluctuation in the markets.   As 2011 winds down positive results will be welcomed with open arms.   Don Vialoux for The Globe and Mail online writes, “Strength is related to anticipation of good news” discussing the early December reports that share such information as dividend increases, share splits and news for the coming year. In most cases rational thinking prevails; do your homework, run the math and make an informed decision. However there have been times when speculation, rumor and guesswork have trumped the market fundamentals. Those who cannot remember the past are condemned to repeat it. There are parallels with past events aligning with events of today: the 1973 oil crisis brought on by the Arab oil embargo, the economic depression of 1893 sparked by poor banking habits that financed the construction of railroads and, my favorite, Dutch tulip mania of the 1630’s. Tulip mania “was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed.  At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman”. The fad of new and exotic blends of tulip bulbs had people buying, trading and selling the product without having ever seen their purchase.  Eventually the ‘tulip bubble’ burst, as all bubbles do, and those stuck on the tail end were left owning tulip bulbs worth a fraction of what they paid for them. There are several recent examples of “mania”.  The housing bubble of the 2000’s, which helped ignite the current financial crisis, as home owners believed that real estate prices could only rise as they continued to leverage their homes – in the end over leveraged.  The 1995-2000 dot-com bubble is another instance that was characterized by the rapid growth of online companies following the internet boom; stock prices were being based on wishful thinking rather than reality. What lessons should we learn?  They are always the same:

  • When something sounds too good to be true, it usually is.
  • When somebody is getting something for nothing, someone else is usually getting nothing for something.
  • When everybody is running in one direction, take a moment to look around and ask ‘why?’
  • History always repeats itself, although never quite the same, there’s usually a common thread.

| Raymond Matt, CFP, CLU, TEP, CHS

Merkel and Sarkozy Halt Public Fighting After Meeting with Italy’s Monti

German Chancellor Angela Merkel, French President Nicholas Sarkozy and new Italian Prime Minister Mario Monti took part in their first three-way talks today in Strasbourg. The trio met to discuss the future of the euro. During a news conference they all stood in a neat little row in front of matching podiums making it quite clear that they form a united front. This represents a change for the Italians as their former PM, the proudly misogynistic billionaire Silvio Berlusconi, was at times vocal about his distain for the common currency. But what to take away? Merkel and Sarkozy appeared to agree that Monti would do the right thing for Italy while Sarkozy stated that they would not get in the way of the European Central Bank, “We all stated our confidence in the ECB and its leaders and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it.” This has the ring of, hang together or hang separately. Germany and France now have Italy to depend on thanks to their newfound friendship with Monti; as BNN.ca points out it will be sink or swim depending on how the Italian fiscal situation unfolds, “Keeping Italy solvent and able to borrow on capital markets is vital to the sustainability of the euro zone. Key Italian bond auctions early next week will test market confidence.” Hopefully they will go better than the German Bond sale that fell 35% short of the mark (no pun intended). Today’s meeting was intended to showcase a new found stability — however according to reports “the euro fell from $1.338 against the dollar at the start of the leaders’ press conference to a low of $1.332 and European stock markets fell back from earlier gains.” The Bank of Canada looks like they see through the façade. As Governor Mark Carney, also the new head of the G20’s regulatory Financial Stability Board, appeared to anticipate the situation when he said during a speech in Montreal yesterday, “European authorities have announced important plans to provide time to refound their monetary union, but acute strains persist. At this point, the crisis appears barely contained.” Furthermore the Bank of Canada will reportedly keep its key interest rate at its current 1%. What is required is calm leadership, a sense of direction and purpose rather than politics. The need for deeds not words. As I am reminded of a line from the movie The Gathering Storm, Winston Churchill, as played by Albert Finney, says to the house “if we fail to act now, history will cast its verdict with those terrible, chilling words, TOO LATE!” | Raymond Matt, CFP, CLU, TEP, CHS

Message to the EU: The Buck Should Stop Here

Much has been written and will be written about the EU’s financial woes.   It is playing havoc with world markets and more troublingly, people’s lives and their life savings. Looking back to 2005 and the claptrap put forth by some European leaders, it is no wonder we are in the mess we are in today. In July 2005 Italy’s then Prime Minister Silvio Berlusconi launched an attack on the euro during a Forza Italia party conference saying it, “screwed everybody”.   In September 2011 Germany’s Chancellor Angela Merkel said during a speech in front of German parliament, “The euro is the guarantee of a united Europe.   If the euro fails, then Europe fails.”  The following month Merkel reiterated her position to the Bundestag, “No one should think that a further half century of peace and prosperity is assured. It isn’t. And that’s why I say if the euro fails, Europe will fail, and that mustn’t happen.” It probably goes without saying, but I can’t help myself; Berlusconi knows a thing or two about screwing and the German’s know a thing or two about the loss of peace in Europe.  My advice to Merkel and Berlusconi’s successor Mario Monti, just keep quiet and get your cheque book out, because the Germans and Italians have a lot to pay for and they’re not nearly there yet.  And for those wondering about the French and the British; we will get to them later. Looking back it is clear to see that former French president François Mitterrand and former chancellor of Germany Helmut Kohl provided vital vision and leadership when forming the EU.  They recognized that in order to have union you need compromise – lots of it.   The EU and the world are in need of leaders with vision; we are in need of leaders who can articulate that vision with clarity and compromise. It is very possible that the alternative to union is extreme nationalism and we have seen where that can lead.  Have we forgotten the fifty three million dead in the last Great War? European leaders of all stripes need to get on with compromise and provide real leadership.  Drop the politics and fear mongering.   I would recommend several “The Buck Stops Here” placards; one for each EU leader for starters. In the immortal words of Benjamin Franklin, “We must all hang together, or assuredly we shall all hang separately.” | Raymond Matt, CFP, CLU, TEP, CHS

Shareholder dividends strong; life insurance policy owner’s dividends down

Last week Canadian financial conglomerate, Power Financial Corporation (PFC), reported that their quarterly profit climbed due to better results by its secondary financial services groups, Great-West Life, IGM Financial, London Life and Canada Life all of which PFC owns majority stakes in. Shares rose following the news, “net earnings attributable to shareholders were $312 million, or 44 cents a share, in the quarter ended Sept. 30. That compared with a year-earlier profit of $294 million, or 42 cents a share,” a Reuters report published by BNN said. Shareholder dividends are strong; however life insurance policy owner’s dividends are down. Higher profits don’t translate to better returns for participating life insurance policy owners; the two have no relation to each other. Participating whole life insurance policies or PAR plans are gaining popularity due to low interest rates and turbulent markets, but don’t be fooled. In May of 1995 Great-West Life purchased 90 per cent of London Life’s shares in a $2.95 billion takeover bid –part of that $2.95 billion was funded through the policy owner’s dividend pool or PAR fund. In 1995 the policy owner’s dividend pool was used to help pay for an acquisition; for the last three years it has been used to make up for the shortfall on bond yields. This lack of accountability to policy owners in regard to the use of the Participating Whole Life insurance dividend pool often results in shareholders coming before policy owners. | Raymond Matt, CFP, CLU, TEP, CHS

Ottawa May Have to Juggle $18.7 Billion Debt

On Tuesday Canadian economist and Parliamentary Budget Officer Kevin Page spoke at a Commons committee in Ottawa to discuss his latest fiscal projections and his findings are solumn and grounding, according to reports. Page’s independent analisys, which appears to be far more daunting than the forcasts outlined by the Bank of Canada and that of private government economists, says that Ottawa could be facing a $18.7 billion deficit by 2015. A report published by Advisor.ca says Page attributes the approaching high debt to an aging population.  More spending on pensions and health care while tax revenues are reduced. Page continued, reportedy stating at this week’s Commons committee that his forcast may even look like wishful thinking if Europe’s debt problems are not resolved. Page suggests further spending cuts or revenue increases.  Translation: Canadians should be prepared to part with more of their wealth. | Raymond Matt, CFP, CLU, TEP, CHS

Canadian Bank Trends Give Hope to Financial Advisors

It appears that financial advisors in Ontario have been given a chance to enhance their sales practices to stand apart from Canada’s top five banking institutions. A report published last week on the Rogers news and business website Advisor.ca gave some interesting advice to financial advisors, suggesting they stick to “needs analysis” and “holistic” planning – taking into account the mental and social factors a client is facing – something that Canadian banks apparently are not doing. According to the Advisor.ca report a province-wide survey, conducted by Canadian financial services market research firm Dalbar, took a look at a number of banks (TD, BMO, CIBC, RBC and Scotia) and found that representatives at those banks were giving the impression of being pushy and aggressive when it came to selling a financial plan. Dalbar’s vice-president of Canadian strategy Anita Lo says in the Advisor.ca report, “Banks are promoting that their experiences are superior, but the actual conversations are still product-driven, if you really listen to them.” With this in mind, a financial advisor is put in a unique position, if he/she has a unique mind. They can move away from impersonal sales techniques and focus on a client’s needs. Read the full article here. | Raymond Matt, CFP, CLU, TEP, CHS

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