Business trends in Life Insurance in Canada
The Canadian life insurance market has shown considerable annual growth during the last five years. Signs indicate that this growth will likely continue. However, for the industry to survive, it is necessary to target millennials and adapt new technologies. Additionally, investment strategies must be altered to account for a volatile world economy, and companies must take preemptive measures to avoid losses when new regulations are implemented.
Business and Market Trends
The Canadian individual life insurance market is burgeoning. It is one of the fastest growing life insurance markets worldwide, selling nearly $50 billion USD in premiums in 2017. Since 2012, annual market growth has averaged 4.3%. Despite steady growth and outstanding sales in recent years, the future of the life insurance market in Canada is uncertain due to economic volatility elsewhere. Global political turmoil could influence the Canadian economy as a whole, including the life insurance industry. For example, there remain lingering concerns over the political impact of the Trump Administration in the United States and Brexit in the European Union on the overall economic outlook. Despite this speculation, the Canadian economy showed growth in 2017, as did the life insurance industry. It is noted that the Canadian life insurance market continues to outperform the market in the United States, where after adjusting for inflation-adjusted United States dollars, life insurance premiums increased by 3% in Canada in 2016.
Notable drivers of industry growth include whole life policy sales and success by independent advisers. In 2015, whole life policy sales grew by 9% in number, and 8% in size. Term life sales also increased by 7%. Independent advisers saw policy sales increase by 12% in the same year, while major insurance companies saw total sales increase by only 6%. That said, the 20 largest life insurance companies still account for 94% of the Canadian market. There have been consistent increases in growth premiums stemming from life insurance and annuities. On the other hand, low interest rates and overall mediocre growth in Canada "will put continued pressure on insurers‘ margins, investment returns and credit fundamentals" in the life insurance market.
Additionally, insurance companies are beginning to increase prices and change the way they invest premiums. Low interest rates are leading to investments being channeled into derivatives and options, with a focus on hedging strategies. Companies are taking fewer risky bets in this volatile economic climate. The industry has also seen benefits from products and strong returns derived from equity markets from 2012 to 2017.
Furthermore, millennials are buying fewer and smaller life insurance policies than the older generation. This means that companies (if they wish to survive) will be forced to change in order to accommodate a customer base with little interest in their current product offerings. This will likely require the adoption of new, social media-based marketing strategies, and the integration of big data and new technologies in the buying and selling process (see "Technology" below). However, the impact of millennials is multi-faceted in the industry. In response to the lack of millennial interest in life insurance, many experts consider it necessary for the industry to refresh itself with younger workers. Companies are searching for young hires who understand the dynamic of the insurance industry in the modern world better than their aging counterparts.
Lastly, Canada's most populous cities (Toronto, Montreal, Vancouver, and Calgary) are epicenters for increases in life insurance policy sales. Population growth and increase in disposable income size in these urban centers make them ideal targets for insurance companies. By targeting urban centers, insurance companies will be able to adapt business models more well-suited for the younger generation and the modern world.
New technology will undoubtedly shape the way life insurance is bought and sold moving forward. Technology will likely be a major disruption for the industry, but could be a keystone for future advancement, growth, and success. Technologies are, in some aspects, a threat, but in others, an opportunity to be seized, especially in a market with waning millennial interest.
Specifically, big data and mobile technology are going to change how life insurance is bought and sold. With big data, new information will be able to be gleaned that likely drive increases in sales, and policies that are better tailored for each customer. Mobile technology will define the relationship between insured and insurer, accelerate the sales and claims processes, and enable new business models altogether as the Internet of Things drives new innovations that yield cost savings. For example, the use of technological advancements such as robotics, analytics, artificial intelligence, and blockchain and expected to become relevant in the insurance industry.
Technology is predicted to be increasingly turn the industry away from paper to provide "more efficient, instant results." In fact, a digital revolution is expected to be a major disruptor in the life insurance segment in Canada, specifically. It remains to be seen how insurers will choose to implement technological innovations in their operations, but it is certain that technology will result in significant changes in how they reach customers.
Social media-based marketing strategies will become an invaluable tool for insurance companies wishing to increase their young customers base. By embracing such platforms, as well as innovative trends such as peer-to-peer sales, companies will be able to reach a larger customer base and target the young demographic upon which their survival is dependent. There is a distinct trends towards renewing the insurance industry as "younger" and "fresher."
Ever-increasing regulation can create potential challenges for the insurance industry. As regulations are introduced, the life insurance game changes. Despite new taxation laws that went into effect at the beginning of 2017, the industry has continued to grow. This is surprising because regulatory changes have initiated market downturns in the past. This is a good sign for the life insurance industry, and a testament to the robustness of the market growth seen since 2012.
There is some speculation that the Financial Services Commission of Ontario (FSCO) will be replaced with a new regulator in years to come. A major top-down shift in insurance regulation could represent a significant disruption to the industry, and has the potential to drastically alter industry function and market trajectory. However, until this happens (if it does at all), accurate predictions about what this looks like cannot be made. Despite this uncertainty, it is critical that insurers are prepared to "adapt to the new solvency standard," which is slated for implementation in the first quarter of 2018. Additionally, an updated final version of the Life Insurance Capital Adequacy Test (LICAT) has been released by the Canadian Office of the Superintendent of Financial Institutions (OSFI), which was effective on January 1, 2018.
Canadian life insurance sales have shown considerable growth in recent years. Drivers for such growth include a boost in whole life policy sales, and increasing success by independent advisers. Diverse regulatory changes have not caused a market downturn (as seen in the past), but could act as a potential disruption in the future. Companies must address the lack of interest from millennials by changing marketing strategies and refreshing the industry with young workers. Big data and mobile technologies will bring foundational changes to the life insurance industry, changing how policies are bought and sold. Overall, market growth and the possibility of new business models enabled by technology make the market favorable.