Life insurance companies tend to be stable in Canada. Can you remember the last failure?
The Office of the Superintendent of Financial Institutions (OSFI) requires insurance companies to hold more capital than their actuarial liabilities require. Insurers must hold 150% of the calculated minimum capital and continuing surplus requirements (MCCSR). In 2014, the companies on average held 239%, according to the Canadian Life and Health Insurance Association (CLHIA). This conservatism is good for policy owners but the return on investment for shareholders suffers.
There are whistleblower requirements for actuaries to report problems without fearing punishment.
Assuris also protects you if your insurance company fails. This not-for profit was established in 1990 under the unwieldy name CompCorp.
“If your life insurance company fails, your policies will be transferred to a solvent company. Assuris guarantees that you will retain at least 85% of the insurance benefits you were promised. Insurance benefits include Death, Health Expense, Monthly Income and Cash Value.”
The most you can lose is 15%. Even that loss is unlikely since the company which assumes the risks will want to honour the original commitments to maintain the reputation of the industry. In addition, you’re fully protected on the first $200,000 of death benefit. If you’re really concerned, you could buy a maximum of $200,000 of life insurance from one company.
Unlike the Canada Deposit and Insurance Corporation, Assuris isn’t government-backed but if the insurance industry ran into huge problems, the government might step in to restore financial stability.
Before buying insurance, you might want to make sure the company is a member of Assuris and take a look at the limits.
The solution for financial trouble
A life insurance company that runs into financial trouble usually gets acquired by a larger company. This helps maintain public trust in the insurance sector. However, the service you receive may drop after the assimilation. Staff with experience may lose their jobs. At least you still have your insurance.
There’s another form of protection that helps prevent problems: reinsurance. Insurance companies don’t want large claims because they are less predictable and can cause instability. Insurance companies would rather have a larger number of smaller claims. That’s why they sell portions of larger policies to third parties called reinsurers. The big names are Munich Re and Swiss Re. Reinsurers pool many policies from multiple companies, so they are able to better predict the claims. In turn, reinsurers may sell mortality risk to retrocessionaires.
An insurance company often uses more than one reinsurer to spread its risks. Clients whose last names start with A to L may go to one reinsurer and M to Z to another.
If a life insurance company does get into financial trouble, the cause is more likely to be mismanagement than adverse claims. That’s tougher to detect and prevent. Fortunately, the insurance industry in Canada tends to be conservative.