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© Copyright 2000 Rogers Media. The following article first appeared in the March 2000 edition of
BENEFITS CANADA magazine.
Tomorrow's group insurance business
What impact will demutualization have on group insurance providers? Get ready for a greater
emphasis on profitability and less choice for national employers.
BY FRED HOLMES
The former Mutual Life of Canada (now Clarica Life Insurance Company) may have been the first out of the
blocks, but by the time the firm put its demutualization plan to a vote by policyholders last June, it was
clear others were close behind. The insurance business in Canada would never be the same.
First came the cheques. Demutualization, which turns firms like Clarica into stock companies rather than
mutual companies, meant an unexpected payday for thousands of individual (and some group participatory)
policyholders across the country. But the real change is still in the development stage. The impact of
demutualization is only now beginning to take shape. Part of that change will mean significant challenges
for the group insurance business.
The Canadian group insurance marketplace has four public stock companies currently: Great-West Life
Assurance, Clarica, Canada Life and Manulife Financial. The latter three demutualized in 1999. This year,
Sun Life of Canada and Industrial-Alliance Life Insurance Company will also become public stock companies
subject to policyholder agreement.
These carriers represent over 61% of the Canadian group insurance market according to benefits canada's
23rd Annual Survey of Group Insurance Providers (see "Major players," below). As the carriers change in
response to demutualization, the landscape for the advisers' marketplace (including agents, brokers and
consultants) will also change. And it will be dramatic.
Canadian group insurance carriers have embraced the bigger is better ideal. The first wave of mergers,
acquisitions and collapses made for extraordinary headlines.
An increase in size provides a quick escalation in market-share. It also affords the opportunity for lower
overhead when spread over a large and wide base. This, theoretically, would make the bigger carriers
substantially more competitive--from a policyholder expense perspective--when compared to the surviving
smaller carriers. In turn, this suggests that the smaller carriers will have to consider either merging for
joint survival or courting an attractive purchaser. The status quo is just not an alternative for the
smaller carriers unless they are niche players.
DEMUTUALIZATION'S EFFECT
The emerging ramifications of demutualization on group insurance policyholders, most all of which were
predicted, are now coming to fruition. Retentions are up on insured and uninsured accounts. User charges
for specified core services are either up or are being introduced. And carriers are starting to assess
realistic user charges for policyholders' consumption of non-core services.
There is an underlying theme emerging from demutualization--an expected return on investment of at least
15%. It is not surprising then to see a move toward conservatism. When we consider the potential for
additional charges to policyholders as a result of demutualization, the real question becomes: What isn't
going to rise?
With required profitability hanging over their heads, it is increasingly evident that group insurance
carriers are becoming selective about which policyholders they include in the bidding process. In fact,
certain newly demutualized carriers are quite public about the type of policyholder with which they will
partner.
These carriers are looking at the policyholder's attitude, their group insurance sophistication, as well as
that of their adviser, and the intensity of work required to provide appropriate service to plan members.
It would appear that carriers are prepared to undertake a never before seen due diligence of potential
policyholders in advance of insuring a policyholder's risk. Risk acceptance is becoming more conservative
as evidenced by higher pool charges and the inclusion of new margins.
Employers who used the 1989-to-1992 recession as a starting point, and who acquired more and more services
from their carriers to the exclusion of advisers (particularly fee-for-service advisers), will find that
demutualized carriers require them to pay the difference when requested services are higher than the
carrier's original fee structure assumption. Carriers will redefine core and non-core services and
establish pricing levels for these services.
Ultimately, policyholders will pay for the level of service they desire. With this pricing action, the
carriers are reaffirming their commitment to the traditional balanced role that advisers play in the group
insurance industry. Carriers anticipate a certain amount of servicing by advisers in their regular pricing,
and they will price certain services in such a way as to drive some business back to the advisers.
MORE CONSOLIDATION
The marketing of employer plans--to find lower rates--should reduce significantly. Carriers are going to
start saying no more frequently. This will be widespread by 2001, when the federal government will allow
the newly demutualized public stock carriers to buy the shares of each other. This could include further
carrier consolidation.
In his Aug. 25, 1999 column, The Globe and Mail's Andrew Willis predicted that the group insurance
carrier market will shrink further, by at least two national carriers once the federal government's
moratorium is lifted. For national employers, it is possible the marketplace could shrink to under five
carriers. Compare that to 1972 when there were over 15 carriers from which national employers could choose.
This leads to an important question. What are the Blue Crosses and other not-for-profit organizations going
to do as the for-profit group carriers get larger and leverage their economies of scale? If there is no
consolidation among these not-for-profit carriers, then the major national carriers will be in a position
to dictate to policyholders and advisers. National employers simply won't have much to choose from in such
a small marketplace. The power pendulum will belong to the major national carriers.
Marketing projects will be reduced, which will affect the adviser's sales representative at the carrier.
Demutualization will see carriers switch from an acquisition focus to a persistency focus. That will mean a
change of status for the sales representative--making him an account executive with future compensation
based on the profitability of the book of business under his responsibility. For some sales
representatives, demutualization could be the end of their group insurance career.
EMPLOYER CHALLENGES
Employers will find that they have to live with the consequences of their plan design and administration
systems, their approach to disability management and the claim fallout costs of staff rightsizing projects.
They will not be able to leave their debts behind as easily by switching to another carrier--carriers' due
diligence of prospective policyholders should see to that.
One of the great concerns among advisers is the extent to which carriers choose to compete with the
services currently rendered by some advisers. Should that happen, advisers will either have to provide more
for the same price (in order to show value), or undercut the costs charged by the carrier. Such competition
will have dire consequences for rate-focused advisers. They will not be able to compete if they lack the
skill sets to perform the services required by their clients.
Carriers and advisers used to work as partners. Soon, carriers will compete with advisers in some areas.
Clearly, the variety of technical services provided by the advisers will become paramount.
The response to carrier consolidation and demutualization has been somewhat limited among smaller advisers
to date. This is because many of the advisers have yet to put a succession plan in place.
It is quite likely that many of these businesses will close. Consider Turnbull & Turnbull Consultants
Ltd. in Winnipeg last year--its clients were pirated away. This will happen within the next decade, as many
of the partners in these firms retire.
The surviving firms will choose not to buy those retiring businesses. They will simply go after their
clients. As a result, there will be substantially fewer adviser firms specializing in group insurance by
the end of this decade. The survivors will have skills and services needed by employers as their core
strength. They will not be rate arbiters.
The message to advisers is clear. Throw out your old rule book. Business will be conducted much differently
in this new millennium. That is a direct result of carrier consolidation, demutualization and the publicly
stated profitability requirements of carriers.
Fred Holmes is national practice leader, group health and welfare, with Buck Consultants in Toronto.
*** ***
Major players
Group insurance providers that have either already demutualized, or that have demutualization plans in the
works, represent 61.4% of the Canadian industry. Here are their rankings in the industry, and their total
business as of Dec. 31, 1998 (in $ millions).
1. Great-West Life Assurance Co. $3,719.4
2. Sun Life of Canada $3,150.6
3. Manulife Financial $2,193.2
4. Mutual Life of Canada (now Clarica) $2,141.0
5. Canada Life $1,664.4
17. Industrial-Alliance Life Insurance Company $256.0
Industry Total $21,383.3
SOURCE: BENEFITS CANADA 23RD ANNUAL SURVEY OF GROUP INSURANCE PROVIDERS
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