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© Copyright 2000 Rogers Media. The following article first appeared in the May 2001 edition of
BENEFITS CANADA magazine.
Waiting for take off
Canada's group insurance industry is in a holding pattern. After years of consolidation and
demutualization, the industry is waiting to see what happens next.
By Andrea Davis
How times change. When BENEFITS CANADA conducted its first survey of the group insurance industry back in 1977,
there were 62 firms listed in the group insurance directory. Today, that number stands at 33. The incredible
consolidation that has occurred in the business over the past two and a half decades indicates that the
industry is accustomed to change and well-prepared for future challenges. But with widespread rumours that
Canada Life and Clarica are poised to become takeover targets in 2002, the consolidation may not be over.
"There probably aren't too many plan sponsors that haven't been involved, in some way or another, in a
consolidation or a conversion into another company when you look at all the consolidation that's taken
place," says Dave Johnston, senior vice-president, group sales and marketing with Great-West Life Assurance
Co. in Winnipeg. "Probably half of the customers out there have been exposed to it in some shape or form."
He adds that he doesn't expect plan sponsors to shy away from certain group insurers simply because those
companies may be bought up at some point in the future.
While it's clear the industry hasn't seen the last of consolidation, it's less obvious now what its
direction will be. "There are probably still too many suppliers in the industry and probably some of the
smaller ones won't be able to reach the levels of efficiency it will take to be prosperous," says Michael
Beck, senior vice-president, group insurance with Clarica Life Insurance Company in Waterloo, Ont.
With more consolidation on the horizon, Canada's group insurers are in a bit of a holding pattern, waiting
for clearance before taking off to their next level of growth.
THE NUMBERS
The 25th annual Group Insurance Report reveals a strong and growing industry. The total group insurance
industry grew by 14.3% in 2000 to reach $26.9 billion in insured premiums as of Dec. 31, 2000 (see "Leaders
of the pack," page 30). That compares with 11.2% growth in 1999, and a 10.6% growth in 1998.
The group health market reached $8 billion in insured premiums last year--a 12% increase over 1999 (see
"Top 20 group health providers," page 31). Great-West Life maintains its No. 1 position in the group health
business, with $1.5 billion in insured premiums as of Dec. 31, 2000.
The group life business, meanwhile, rose 6% to $1.9 billion . Great-West Life nabs the top spot in the
group life market, with $371.7 million in insured premiums as of Dec. 31, 2000. Administrative services
only (ASO) deposits are up 12% to $6.7 billion.
Canada's pension providers reported 9.2% growth for the year ended Dec. 31, 2000 (see "Pension providers,"
page 38). The growth is made up of a 9.2%, or $5.8 billion, increase in pension assets under management,
and a healthy 20%, or $1.7 billion, jump in pension contributions. Clarica is bumped from its No. 1
position by Sun Life in the pension assets managed category ($12.2 billion as of Dec. 31, 2000) and by
Great-West Life in the pension contributions category ($2.3 billion as of Dec. 31, 2001).
The highest year-over-year increase by product group was for supplementary hospital. Premiums in that
category rose by a whopping 71% to $72.2 million over the course of 2000 (see "Tracking product leaders,"
page 33). For the second year running, extended health represented the biggest product line for the group
health insurance business, with $2.6 billion in insured premiums.
BEHIND THE NUMBERS
The story behind the numbers proves most interesting. A new focus on profitability over the past few years,
driven in part by demutualization, has accelerated the consolidation trend.
Companies that have demutualized--turning from mutual companies into stock companies--over the past couple
of years include Clarica (known as Mutual Life of Canada prior to demutualizing), Canada Life, Sun Life,
Manulife Financial and Industrial-Alliance Life Insurance Company.
"Demutualization and consolidation are very closely related," says Johnston. "Because of consolidation,
some companies were taking over others and mutual companies were at a bit of a disadvantage to participate
in that merger activity."
Aside from being able to participate more fully in mergers and acquisitions, demutualization has resulted
in a more rationally priced group insurance industry. With newly demutualized group insurers focused on
creating returns for shareholders, plan sponsors have seen large premium increases over the past year.
"From a financial standpoint, a lot of our clients have had to face 20% to 30% increases in premiums," says
Gilles Dufresne, practice leader, healthcare and group benefits with William M. Mercer Ltd. in Montreal. He
says he knows of one plan sponsor who had a 200% increase in premiums this year, after having had a 100%
increase last year.
"The carrier in the future will adjust their rates immediately [if a chunk of business isn't profitable].
Before, they would be spreading losses over a period of time," says Dufresne. "In the future, if drug plan
costs increase by 15%, the carrier's going to ask for 20% [from the plan sponsor]. The full inflation will
be passed on to the client immediately."
In an environment where group insurers are no longer competing on price alone, plan sponsors have little
incentive to shop around for a better deal since pricing across the industry has become more equitable.
"There's a much more responsible approach to pricing in the industry now," says Beck. "We went through a
period a few years ago where generally the business was being underpriced and insurance companies were
trying to achieve growth by pricing. There's only so much business to go around so profitability was
getting thin. That's much healthier now."
While the industry may be healthier from a pricing standpoint, it still has a ways to go, says Faizel
Alladina, assistant vice-president, group marketing with Canada Life in Toronto.
"Demutualization isn't going away and that's certainly going to be a driver in terms of putting pressure on
insurance companies to maintain pricing that's reflective of the cost of doing business," he says.
"Although things have improved from a year ago, the industry is still not at the point where everyone's in
a healthy, profitable environment."
Demutualization and consolidation have dramatically changed the relationship between group insurers and
plan sponsors. In the past, if a plan sponsor was unhappy with its carrier, the sponsor could easily go to
market and find a different carrier who would give the plan sponsor at least the same service on better
terms than what it was getting from its existing one. But in a consolidated marketplace with fewer major
carriers, going to market means plan sponsors have a restricted number of alternatives.
The consolidation trend begs an obvious question--how far can it go? While the industry is in a holding
pattern for now, what happens if there are only three or four major carriers at some point down the road?
"I think markets are generally self-correcting," says Johnston. "When you have too many competitors, the
market tends to correct itself through consolidation. And if you have too few competitors, markets tend to
correct themselves with new entrants. I don't see our industry as being any different."
Johnston adds that if the industry ever gets to the point where there aren't enough competitors to the
detriment of plan sponsors, then there are likely other financial services companies, such as banks, that
might step into the group insurance business.
The effects of consolidation will depend on how players operate in the new environment, says Joseph
Iannicelli, vice-president, marketing, with Standard Life in Montreal.
"If it becomes an oligopoly then I'm not sure consumers will win," he says. "I think we'll have three to
five major players with many regional and specialty players that will play a role as well."
OTHER KEY DRIVERS
The bottom line cost for employers is their claims. Industry players cite drug and disability costs as key
concerns for plan sponsors in the coming years. Drug premiums rose by almost 13% for the year ended Dec.
31, 2000, representing a $44 million jump, while long-term disability premiums rose by 17%, representing a
$295 million increase (see "Tracking product leaders," above).
"The challenge that's causing us the most concern is rising healthcare costs," says Clarica's Beck. "The
rapidly rising cost of prescription drugs is occupying a good deal of our thinking about how to deal with
that on behalf of our customers."
Johnston agrees. "Drugs continue to grow at a rate many, many times the normal Consumer Price Index and
normal wage increases, which puts a lot of pressure on plan sponsors," he says. "We don't see that abating
in any way because there are so many new drugs coming out and we're all aging, which will continue that
pressure. Drugs and disability claims management are the two issues we hear are top of mind for sponsors."
In the future, this cost pressure may result in more defined contribution-type plans and flex benefits.
"We've actually seen in the last couple of months a real spike in demand for flex quotes," says Alladina.
"We've been offering flex for some time but this might be a trend we'll continue to see in 2001."
There are also signs of rising dental costs. Dental costs have been reasonably stable over the past few
years but those costs may start to rise more quickly, particularly in Ontario, where the Ontario Dental
Association (ODA) is phasing in a new fee guide next year.
"The ODA has given notice of its intention to increase its fees over the next five years and unbundle
services that used to be bundled. The ODA will charge separately for them and remove the discounts it used
to give on bundling," says Beck. "That's a cloud on the horizon."
Another cloud on the horizon over which plan sponsors and group insurers alike have little control is a
looming economic slowdown and its possible impact on group insurance plans.
"If you're a Nortel, and you're laying off thousands of people, you have a lot of people who start to worry
and feel their jobs are at risk," says Dufresne. "They start building stress and that will have an impact
first on the short-term disability costs. But it could also have an impact on the long-term disability
[LTD]. Actuarial studies show that claims costs increase in slower economic times."
But plan sponsors haven't seen a decrease in LTD claims over the past few years, despite the booming
economy of the mid- to late-1990s.
"Claims for mental and nervous disorders have been increasing, despite a good economy," says Standard
Life's Iannicelli. "If the economy dips as it may in the next year or two, the traditional claims that
haven't been incurred as a result of a strong performing economy will increase and you're going to have a
difficult situation on your hands. You'll have a much higher than average incidence of disability."
The effects of an economic slowdown could affect the pension side of the group insurance industry as well.
"We've had some great equity markets over the last few years which have really driven the defined
contributuion market," says Cathy Honor, outgoing vice-president, group retirement services, with Sun Life
in Toronto. "We've seen our so-called 'conservative Canadians' or 'GIC refugees' move from 80% or so in
guaranteed investment certificates to 80% in market-based funds over the last 10 years. The big market
correction we've seen over the last four months will be a true test of plan members' investment
understanding and the effectiveness of plan education."
Honor announced last month that she's leaving Sun Life for RBC Insurance, where she'll be a senior
vice-president.
TECHNOLOGY
There is consensus among industry players that a key driver of the group insurance industry in the months
and years to come is technology. Internet-based services in particular are becoming more common and plan
sponsors are demanding Internet capabilities from their providers.
"Technology is very high on plan sponsors' list of what a company brings to the table," says Mike Collins,
vice-president of marketing, group benefits, with Manulife Financial in Waterloo, Ont.
But the technology trend isn't being driven by plan sponsors alone. Plan members want more e-based services
as well.
"We're blown away by the demand for Internet services by [pension] plan members," says Honor. "It's our
biggest self-service channel. The number of Internet visits per month is over seven times the number of
phone calls to the call centre."
Group insurance had traditionally been a paper-intensive business. Today, all the major providers are
rapidly pushing forward their Internet development strategies.
"We're going to see electronic claims entry, the traffic of receipts between plan members and carriers will
end, and we're going to see the paper explanation of benefits be replaced either by e-mail or Internet
sites," says Beck. "I think we're generally going to see the standards of service greatly improve as paper
starts to be driven out of the business. I see this as being a period of very rapid development over the
next two to three years."
From a supplier standpoint, technology requires significant investment. But it should result in long-term
savings for plan sponsors. "Allowing greater access to the carrier's systems to promote self-service is
definitely a major shift that will promote downward price pressure," says Alladina. "As those efficiencies
are realized and the cost of doing business is cheaper, it's going to force carriers to reflect that in
their pricing."
Insurance companies with assets of less than $5 billion are likely to become takeover targets as of Dec.
31, 2001, which is when the federal government ends its protection policies for the insurance sector. The
rules were implemented by the Office of the Superintendent of Financial Institutions to prevent a massive
buyout by the banks when the insurance industry began demutualizing. In addition, companies that can't
afford to make the necessary investments in technology to stay on top may also become attractive
acquisitions. Against this background, expect the holding pattern the group insurance industry finds itself
in now to end with a takeoff towards more consolidation in the coming years.
Leaders of the pack
Great-West Life maintains its No. 1 position again this year. The company also charts the biggest growth
with a 39% jump in insured premiums. Overall, the industry grew its insured premiums by 14%.
1 Great-West Life Assurance Co.1
2 Sun Life of Canada
3 Clarica Life Insurance Company 2
4 Manulife Financial
5 Canada Life
6 Standard Life Assurance Co.
7 Maritime Life Assurance Company
8 Pacific Blue Cross/B.C. Life & Casualty
9 Alberta Blue Cross
10 National Life of Canada
11 Atlantic Blue Cross Care
12 Desjardins-Laurentian Life Assurance
13 Green Shield of Canada
14 SSQ Life Insurance Company Inc.
15 Liberty Health
16 Industrial Alliance Life Insurance Co.
17 Co-operators Life Insurance Company
18 UNUM: Provident Life and Accident Insurance Company
19 Quebec Blue Cross
20 Manitoba Blue Cross
Footnotes
1 Figure includes London Life business.
2 Clarica purchased Royal Trust assets as at Dec. 31, 2000.
Notes: Figures are as of Dec. 31 in year stated; figures exclude creditor life, health and disability
premiums.
Top 20 group health providers
Group health providers posted a 12% increase in overall insured premiums.
1 Great-West Life Assurance Co.
2 Sun Life of Canada
3 Manulife Financial
4 Clarica Life Insurance Company
5 Canada Life
6 Maritime Life Assurance Company
7 Desjardins-Laurentian Life Assurance
8 SSQ Life Insurance Company Inc.
9 Standard Life Assurance Co.
10 Liberty Health
11 Pacific Blue Cross/B.C. Life & Casualty
12 Co-operators Life Insurance Company
13 UNUM: Provident Life and Accident Insurance Company
14 Green Shield of Canada
15 Industrial Alliance Life Insurance Co.
16 National Life of Canada
17 Alberta Blue Cross
18 Atlantic Blue Cross Care
19 La Capitale assurances de personnes inc.
20 Zurich Life Insurance Co. of Canada
Note: Figures are as of Dec. 31 in year stated.
Top 20 group life providers
Total insured premiums collected by group life providers grew by 6% last year. Liberty Health fared best,
with a 43% jump.
1 Great-West Life Assurance Co.
2 Sun Life of Canada
3 Manulife Financial
4 Clarica Life Insurance Company
5 Maritime Life Assurance Company
6 Canada Life
7 Desjardins-Laurentian Life Assurance
8 SSQ Life Insurance Company Inc.
9 Co-operators Life Insurance Company
10 Standard Life Assurance Co.
11 Industrial Alliance Life Insurance Co.
12 National Life of Canada
13 La Capitale assurances de personnes inc.
14 UNUM: Provident Life and Accident Insurance Company
15 Blue Cross Life Insurance Co. of Canada
16 Liberty Health
17 Equitable Life of Canada
18 Zurich Life Insurance Co. of Canada
19 Empire Life Insurance Company
20 Assumption Life
Note: Figures are as of Dec. 31 in year stated.
Pension providers
Group insurers in the pension business saw a 9.2% growth in pension assets managed in 2000.
1 Sun Life of Canada
2 Great-WestLife Assurance Co.1
3 Clarica Life Insurance Company
4 Standard Life Assurance Company
5 Canada Life
6 Manulife Financial
7 Desjardins-Laurentian Life Assurance
8 Industrial Alliance Life Insurance Co.
9 National Life of Canada
10 Maritime Life Assurance Company
11 Co-operators Life Insurance Company
12 SSQ Life Insurance Company Inc.
13 Assumption Life
14 Empire Life Insurance Company
15 Equitable Life of Canada
16 Zurich Life Insurance Co. of Canada
17 La Capitale assurances de personnes inc.2
Footnotes
1 Figure includes London Life business.
2 La capitale assurances de personnes was listed last year as La Personelle Vie.
Pension contributions
1 Great-WestLife Assurance Co.1
2 Sun Life of Canada
3 Standard Life Assurance Company
4 Clarica Life Insurance Company
5 Canada Life
6 Manulife Financial
7 National Life of Canada
8 Industrial Alliance Life Insurance Co.
9 Maritime Life Assurance Company
10 Co-operators Life Insurance Company
11 SSQ Life Insurance Company Inc.
12 Assumption Life
13 Empire Life Insurance Company
14 Equitable Life of Canada
15 Zurich Life Insurance Co. of Canada
16 La Capitale assurances de personnes inc.2
Footnotes
1 Figure includes London Life business.
2 La capitale assurances de personnes was listed last year as La Personelle Vie.
Note: Figures are as of Dec. 31 in year stated.
Top 20 administrative services only providers
At a 12% overall increase, administrative services only deposits are up from last year's growth of 10.1%.
1 Great-West Life Assurance Co.
2 Sun Life of Canada
3 Manulife Financial
4 Clarica Life Insurance Company
5 Alberta Blue Cross
6 Pacific Blue Cross/B.C. Life & Casualty
7 Atlantic Blue Cross Care
8 Maritime Life Assurance Company
9 Green Shield of Canada
10 Canada Life
11 Liberty Health
12 Manitoba Blue Cross
13 Standard Life Assurance Co.
14 Quebec Blue Cross
15 Co-operators Life Insurance Company
16 Industrial Alliance Life Insurance Co.
17 Desjardins-Laurentian Life Assurance
18 Saskatchewan Blue Cross
19 Blue Cross Life Insurance Co. of Canada
20 National Life of Canada
20 SSQ Life Insurance Company Inc.
Note: Figures are as of Dec. 31 in year stated.
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