How Stable is Canada’s Life Insurance Industry?
Over the past decade, the number of life insurance companies operating in Canada has decreased dramatically because of mergers and acquisitions. For example, people who had policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life now find themselves insured by Manulife Financial. How concerned should we be about the state of the life insurance industry in Canada as a result?
As it turns out, 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 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). Companies that are provincially chartered are overseen by the province in which they do business. Don't worry, though: all of the major life insurance companies are federally regulated by OSFI.
OSFI oversees the stability of life insurance companies by requiring them to maintain adequate reserves, known as "actuarial liabilities," to meet their future contractual obligations. Life insurance companies are required to put money aside and invest it prudently in order to pay future benefits on policies that they have sold in the past. These reserves are generated both 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." 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 also requires that life insurers maintain an amount of capital equal to 150% of the MCCSR. As of the end of 2012, the MCCSR ratio maintained by Canadian health and life insurance companies was 213%.
A not-for-profit organization called Assuris offers additional protection to life or health insurance policyholders. This organization works in a manner similar to the Canadian Deposit Insurance Corporation and protects policyholders should their insurance company fail. Assuris guarantees contractual benefits to a minimum of 85%, with 100% protection for the following:
- Death benefit: $200,000
- Health expenses: $60,000
- Monthly income (disability, annuity etc): $2,000
- Cash surrender values: $60,000.
This combination of strong, effective oversight and regulating prudently-invested actuarial liabilities has resulted in a robust financial industry that has assets of more than $514 billion in Canada. In fact, 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 $500 billion in assets abroad.
It is important to remember that no insured individual has ever lost any contractual benefits due to their insurance company being acquired by another. 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.
