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

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