Given the problems encountered by some large financial institutions in the United States, how concerned should we be about the state of the life insurance industry in Canada? It is a fact that over the past decade the number of life insurance companies operating in Canada has decreased dramatically. This decrease is mainly due to the mergers and acquisitions of the existing companies. For example, those individuals who maintained policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life, now find themselves insured by Manulife Financial. Today, 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 of the 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). For those companies that are provincially chartered their oversight is provided by the province in which they do business. The major life insurance companies are federally regulated by OSFI.
OSFI oversees the stability of life insurance companies by enforcing the requirement that adequate reserves be maintained in order for the companies to meet their future contractual obligations. Reserves are known as “actuarial liabilities” and each company is required to put money aside and to invest that money prudently so that they may pay future benefits on policies that they have sold in the past. These reserves are generated 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.” Also, 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 necessitates that the life insurers maintain an amount equal to 150% of the MCCSR requirement. As of the end of 2012 the MCCSR ratio maintained by Canadian Health and Life insurance companies was 213%.
As additional protection afforded a life or health insurance policyholder, there are benefits provided to all policyholders through a not-for-profit organization known as Assuris. This organization in a manner similar to the Canadian Deposit Insurance Corporation protects policyholders should their insurance company fail. Assuris guarantees contractual benefits to a minimum of 85% with 100% protection for the following:
- Death benefits – $200,000
- Health expenses – $60,000
- Monthly income (disability, annuity etc). – $2,000
- Cash surrender values – $60,000.
The combination of strong effective oversight and regulation of prudently invested actuarial liabilities have resulted in a robust financial industry enjoying assets of more than $514 billion in Canada, making the industry one of the largest investors 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. The industry in Canada employs over 135,000 people.
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.
