Annual lists 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

- All Financial Sector Fact Sheets -

Canada’s Financial Services Sector

Canada's Life and Health Insurers

February 1999

Overview

• Canada's life and health insurance industry encompasses 132 federally incorporated companies and foreign branches.

• Canada's life and health insurers account for 12.8 per cent of the assets held by Canadian financial institutions. They participate in financial markets by providing long-term capital to both government and business.

• Apart from traditional life insurance products, retirement products such as annuities, Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) represent a fast growing part of the life insurance business.

• Canada's domestic insurers are strong in their home market. Eighty-nine per cent of life insurance business in Canada is with domestic firms.

• In 1997, Canadian insurers received $24 billion from foreign clients; this represented 44 per cent of all their premium income. Ten million foreign residents own almost $1.1 trillion in life insurance policies underwritten by Canadian life and health insurance companies.

• Regulation of Canada's life and health insurance industry is shared between the federal and provincial governments. However, the federal government, through the Office of the Superintendent of Financial Institutions (OSFI), supervises federally incorporated and foreign firms holding over 90 per cent of total industry assets.

• The investments of life and health insurers are not subject to specific quality tests but are instead governed by a "prudent person" rule, which allows more flexibility to optimize investment returns subject to clearly defined risk management criteria.

• OSFI regulates the capital of domestic insurers using the Minimum Continuing Capital and Surplus Requirements test. This test, similar to the Bank for International Settlements capital adequacy rules for banks, is supplemented by the Test of Adequacy of Asset Margins, which is used for foreign insurers.

• Although there is a strong regulatory framework in place to protect policyholders, an additional safeguard is provided by the Canadian Life and Health Insurance Compensation Corporation (CompCorp), an industry run policyholder protection plan.

• By April 1998, four large federally incorporated mutual life insurance companies had announced plans to demutualize: Manufacturers Life, Sun Life, Mutual Life and Canada Life. Demutualization is a process by which a mutual company converts to a stock company.

Introduction

Canada's life and health insurance industry encompasses 132 active firms. Despite recent consolidation, the highest market share for any single company does not exceed 20 per cent.¹ Canadian life insurers include companies incorporated both domestically and abroad, and are divided between mutually-owned and shareholder-owned firms (see Table 1).

Table 1

The life and health insurance industry directly and indirectly employs over 100,000 people. Just over 60,000 are employed directly by the insurers while the remainder work as independent brokers. Most life insurance company products and services are sold and issued through a network of insurance agents. These include 18,000 agents directly employed by the companies and an additional 40,000 independent insurance brokers, many of whom also sell property and casualty insurance. In total, the life and health insurance industry employs more people than each of the forestry, chemicals, or pulp and paper sectors of the Canadian economy.

Eighty-three per cent of Canadians own life insurance, and 89 per cent of that business is with domestic firms. The total value of life insurance owned by Canadians as of 1997 was in excess of $1.7 trillion.

Canada's life and health insurance companies have assets of almost $200 billion, ranking them third in the Canadian financial sector after banks and trusts, and mutual funds. (see Chart 1).

International operations

A number of Canada's life and health insurers are active in foreign markets; life insurance services are sometimes characterized as Canada's most important "export." Over a dozen Canadian-controlled life and health insurance companies operate branches and subsidiaries in more than 20 different countries. Among the G-7 nations, Canada's insurers derive the largest percentage of premium income from foreign sources. For the sector as a whole, 44 per cent of premium income is received from abroad (for some companies, the percentage has reached 65 per cent) and the share is increasing. From 1990 to 1997, foreign premium income grew at an average annual rate of 11.3 per cent. When ranked against other major Canadian industries by foreign revenue as a percentage of total revenue, the life and health insurance industry ranks fifth, ahead of all other participants in the financial services sector. Ten million foreign residents own $1.1 trillion in life insurance policies underwritten by Canadian life companies.

Foreign premium income has been growing rapidly over the past five years, both in raw numbers and as a per cent of total premium income (see Chart 2). Although Europe and the United States provide the bulk of foreign premium income, both are relatively mature markets. Canadian firms have targeted Latin America and Asia as their growth markets for the future (see Chart 3).

Regulation and supervision

The federal and provincial governments share jurisdiction over life and health insurers. Federal supervision encompasses Canadian-owned insurers and branches of foreign companies holding more than 90 per cent of industry assets. In general, the provinces regulate licensing and marketing while the Office of the Superintendent of Financial Institutions (OSFI) ensures that the companies have sufficient assets to honour their policies.² Thus, while there are 18 separate regulatory bodies in Canada (12 provincial and territorial regulators, five provincial insurance councils and the federal government), supervision is smoothly integrated.

In 1925, the common law provinces (all except Quebec) first enacted uniform life insurance legislation on insurance contracts and beneficiary rights. These acts, known collectively as the Uniform Life Insurance Act, are updated periodically and apply to all contracts made in the jurisdiction concerned. Similarly, accident and sickness insurance legislation enacted over the years in the common law provinces is sufficiently similar that it is referred to as the Uniform Accident and Sickness Act. Quebec has civil code provisions for both life and accident and sickness insurance. These provisions are similar to what is found in the common law provinces. Life insurance agents are covered by the insurance acts of each province, and each province has also developed administrative practices. All provinces, including Quebec, continue to pursue further harmonization.

Policyholder protection

Since 1990, life insurance policies, accident and sickness policies and annuity contracts in Canada have been guaranteed up to certain limits by the Canadian Life and Health Insurance Compensation Corporation (CompCorp),³ a consumer protection plan created and financed by the life and health insurance companies. Nonetheless, policyholder protection primarily depends on such factors as actuarial liabilities and the capital of life and health insurers, as well as the quality of financial regulation.

Companies in Canada can compete in regard to rates, terms, and conditions of life and health insurance policies and annuity contracts. Life and health insurers must, however, satisfy regulatory authorities that actuarial liabilities are sufficient to meet the anticipated requirements of policyholders. Over the past few years, the overall solvency margin (capital and surplus as a percentage of liabilities) has increased (see Chart 4).

OSFI regulates domestic companies' capital adequacy through the Minimum Continuing Capital and Surplus Requirements, which measures the minimum capital and surplus required by a company adjusted for risk factors of the business and its investments. For foreign entities, OSFI administers the Test of Adequacy of Asset Margins. These tests are similar to the Bank for International Settlements capital adequacy rules for banks. The tests have two main components: first, a risk-based formula to determine how much capital is required; second, a definition of capital or margin available to meet this risk-based requirement. If the regulatory capital of a firm falls below 120 per cent of the minimum required, the company must provide OSFI with detailed plans for raising capital.

As in many other countries, Canada has moved away from explicitly regulating the quality of investments, known as "legal-for-life" rules, to a "prudent portfolio" approach,⁴ which allows more flexibility in investment. For example, the prudent portfolio approach provides more scope for portfolio diversification strategies and the use of derivative products for hedging purposes.

Profitability

Life and health insurance companies have continued to increase their return on equity since the economic downturn in the early 1990s (see Chart 5). However, their profitability has trended somewhat behind that of other financial institutions (see Chart 6). This may reflect intense competition and a continuing process of consolidation. In 1997, OSFI approved 10 requests for amalgamation, mergers or transfers of blocks of business between federally incorporated life insurance companies in Canada. In the past few years a number of foreign insurers, including New York Life and Metropolitan Life Insurance, have withdrawn from the Canadian market.

Investments

Earnings on investments account for about one-third of industry revenues, with premiums accounting for most of the rest. Chart 7 shows the asset structure of Canadian life and health insurance company investments for the period 1993-1997. At the end of 1997, the asset allocation was approximately 44 per cent bonds, 22 per cent mortgage loans, 20 per cent stocks, 4 per cent real estate and 10 per cent other assets, including cash and policy loans. The percentage of assets in mortgages and real estate has declined steadily since the sharp decline in commercial real estate values in the early nineties, while the percentage in stocks has increased in tandem with the strength in equity markets from 1993 to 1997.

Life and health insurers are important participants in Canada's capital markets, providing long-term capital for both the public and private sectors. Their portfolio is balanced by region, supporting economic development across Canada. Life and health insurers account for two-thirds of the corporate bonds held by financial institutions, and 30 per cent of corporate bonds outstanding in Canada, excluding the energy, mining, and resource sectors. In addition, this industry is the single largest holder of provincial and municipal securities.

Life insurance products

Canada's life and health insurance companies figure prominently in the market for private sector health and accident and sickness insurance, which complement public insurance plans. They are significant participants in the market for private pensions, and are the most important issuer of annuities. Although industry participants once concentrated on traditional products such as whole life, the increasing financial sophistication of the Canadian consumer has led them to offer more innovative products such as universal life and variable universal life. The value of these products varies with either interest rates or a basket of securities, and allows policyholders flexibility in the timing of their payments.

In addition, as Canada's demographics have changed, life insurance as a whole has become a less important product while savings products such as annuities have assumed greater prominence. For example, in 1970, annuities formed only 19 per cent of premium income; by 1997, they made up almost half (see Chart 8). Other products offered by life insurers put them in direct competition with banks, trust companies and credit unions. They also compete with securities firms in the market for mutual funds.

Accident and sickness insurance

While Canada has a publicly funded system of medical and physician services, life and health insurers play an important role in many parts of the country. Over 90 per cent of Canada's private health insurance is provided by Canada's life insurance companies, with the remainder provided by some property and casualty companies who have licences to carry this line of business. Non-profit groups such as the Blue Cross also provide these coverages.

The services provided by life and health insurance companies – three-quarters of which are active in the provision of health insurance – include extended health care for hospitals, travel health insurance, dental insurance and "critical illness coverage."

Pensions and annuities

Several companies are active in the management and investment of pension savings and contributions, and in the overall administration of the plans. While legislative restrictions prevent other federal financial institutions from directly issuing annuities, life and health insurers face competition in most other pension areas. Even annuities face competition from Registered Retirement Income Funds, which can be offered by a wide variety of financial institutions, and which allow the holder to vary the amount of pension withdrawals over a lifetime.

Life and health insurance companies manage the largest number of private pension plans sponsored by employers and unions, known in Canada as Registered Pension Plans (RPPs). Regulation of pension plans in Canada is predominantly at the provincial level with the federal government having jurisdiction over pension plans for federally regulated entities and federal government Crown corporations. Life and health insurers' RPPs usually consist of small- and medium-sized plans, as larger plans are often funded through trusteed arrangements.

Distribution network

Canada's life insurers have many different channels to distribute their products. They can sell them through captive agents who handle only one company's products; through independent life insurance brokers; as a group plan through an employer; and directly to the customer over the phone or the Internet. Distributing products through a career agent has generally been the most expensive method. Online selling over the Internet has recently emerged as the most cost-effective pathway. As insurers reduce their reliance on brokers, some independent life agents are licensing themselves as mutual fund representatives.

Future challenges

As life and health insurance companies have faced slower growth in their core markets, they have pushed into areas not traditionally identified with the sector. Products such as Registered Retirement Savings Plans (RRSPs) and mutual funds have exhibited much faster growth in Canada than traditional life insurance products. Although life and health insurers have increased their RRSP business by more than 8 per cent a year this decade, RRSPs as a whole have grown by 12 per cent a year. Life insurers' market share of RRSPs has declined from 21 per cent in 1990 to 16.7 per cent in 1997. Their performance in mutual funds (including RRSP holdings) has been markedly better, with market share increasing from 2.8 per cent to 4.7 per cent from 1991 to 1996. Nonetheless, their market share remains small in this rapidly expanding market.

Demutualization

Four of the five largest life insurance companies in Canada are mutually-owned companies (The Mutual Life Assurance Company of Canada, The Manufacturers Life Insurance Company, Sun Life Assurance Company of Canada and The Canada Life Assurance Company). They have expressed an interest in demutualization in order to improve the efficiency and competitiveness of their companies through increased flexibility to access capital, greater market scrutiny and a better understood corporate structure.

In August 1998, the government released a consultation paper outlining a proposed demutualization regime for all mutual life companies. The government's overriding objective in developing the proposal was to ensure the protection of policyholder interests. Under the proposed regime, the entire value of a converting company would be allocated only to its voting policyholders. Furthermore, any proposal to demutualize would require the approval of these policyholders in order to proceed. The entire demutualization process would be overseen by OSFI.

After further consultations with stakeholders, legislation to facilitate the demutualization process was introduced in the House of Commons on November 30, 1998. It is expected that the legislative and regulatory framework for demutualization will be in place by spring 1999.

Appendix 1

Top Ten Firms by Individual Life Insurance 
Premiums from Canadian Operations (1997)¹

Top Ten Firms by Group Life Insurance Premiums 
From Canadian Operations (1997)¹

¹   For certain lines, such as individual life, the highest market share is greater than 20 per cent.

²   In Quebec, this responsibility is also carried out by the Inspector General of Financial Institutions (IGFI) for provincially incorporated firms.

³   Membership in CompCorp is mandatory for federal and most provincial companies transacting life and accident and sickness insurance. CompCorp covers life insurance policies of up to $200,000 and savings products up to $200,000.

⁴   Under this approach, an institution is required to establish and adhere to lending and investment policies that a "reasonable and prudent person" would apply. OSFI has issued guidelines on what this would mean in practice.

This is part of a series of short monographs by the Department of Finance describing the Canadian financial system. Copies are available from: The Department of Finance, 140 O'Connor Street, Ottawa, Ontario K1A 0G5.