AN OVERVIEW OF THE CANADIAN LIFE INSURANCE
INDUSTRY
After reading this, you should understand:
The size and scope of the Canadian life insurance marketplace Insurance basics
The Canadian life insurance industry is a significant player in the national economy. The 96 life and health companies that were operating in Canada at the end of 2009 employed about 131,900 people. These companies held over $474 billion in assets on behalf of their policyholders.
In 2009, Canadians purchased over 757,000 individual insurance policies, paid over $79.1 billion in premiums on existing and new life, health, and annuity policies, and, by the end of the year, Canadians owned over $3,474 billion in life insurance. In the same year, Canadian insurers abroad generated over $77.4 billion from foreign clients for life and health insurance.
Ratings organizations show that Canadian insurers are some of the most financially secure in the world. Standard and Poor’s, Moody’s, A.M. Best Company, Wiess Research, and Duff & Phelps all provide ratings on the ability of insurers to pay according to the terms and conditions of their policies and contracts. Their ratings are based on a scale that begins with a top rating, such as the triple-A rating provided by Standard & Poor’s, and ends with a lowest rating. For Standard & Poor’s this is represented by a double-C. The top rating, AAA, indicates an extremely strong ability to meet financial commitments. The lowest, CC, would apply to a company that is likely not to meet some of its commitments. Despite weakening economic conditions from 2008 to 2010, Canadian insurance companies continue to enjoy strong ratings.
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Life insurers sold over 757,000 individual life policies in 2009.
The Basics of Insurance
What is insurance? Insurance is based on the concept of an insurance company issuing a contract of insurance to a policy owner that promises certain benefits should the risk that is being covered manifest itself, and charging a fee in the form of policy premiums to cover the payment of those benefits. The policy premiums paid to the insurer are cautiously invested so that the promise of the contract will be honoured when a claim is made.
The promise of the contract varies according to the type of insurance contract issued. A life insurance contract promises that a sum of money, called the face amount or the death benefit, will be paid when the life insured named in the contract dies. Some
life insureds
die prematurely ─ perhaps even as soon as after one premium has been paid by the policy owner. Some life insureds will live longer than predicted by the mortality tables of the life insurer, and some life insureds will not die during the period their policy is in force. Regardless of when death occurs, the promise made by the insurer to pay the benefit of the contract to the beneficiary will be honoured when proof of death of the life insured is provided.Who is the insured in an insurance contract?
A The beneficiary
B The person on whose life the insurance is based C The life insured
D The policy owner
You will help applicants for life, disability, and health policies to determine the right amount of coverage. Your efforts help to prevent overinsurance or underinsurance.
Insurance contract An insurance contract is a contract that obliges the insurer to fulfil the terms of the contract as long as premiums are paid.
Policy owner The policy owner applies for the policy and makes the premium payments. The policy owner is also called the insured. He or she may also be the life insured.
Policy premiums The premium is the periodic payment made by the policyholder or his or her legal representative that is required to keep an insurance policy in force.
Claim
When the beneficiary of a life policy or insured of an insurance policy seeks the benefit from the policy
Face amount The basic amount of insurance payable on the event covered in the contract. This is the amount stated on the Face page of the policy. Life insured
The life insured is the person on whose health, gender, and age the premiums are based.
Beneficiary This is the person or people to whom the proceeds of a life policy are paid when the insured dies.
The promise of disability incomeinsurance is that a monthly payment, called the monthly benefit, will be paid to the insured who is sick or injured. This type of insurance replaces income lost when the policy owner is unable to work due to an injury or illness.
Like life insurance, a premium is paid by the insured to the insurer. The amount of premium is based on morbidity tables that predict the likelihood of disability for the person seeking insurance. A person who has a high probability of making a claim will pay a higher premium than one who is less likely to make a claim. This would be the case if one person works in a more dangerous job than another.
Mary has a disability income policy and pays the premiums. This means she is the:
A Group insured
B Insured
C Annuitant D Insurer
The promise of a health insurance contract is that there will be a payment or reimbursement made to the insured against a variety of medical expenses that have been incurred according to the type of policy. An accident and sickness policy, for instance, will reimburse the cost of prescription drugs or dental expenses. A critical illness policy will make a lump-sum payment if a life-threatening illness has been diagnosed. Insurance for long-term care makes a monthly payment to a facility that provides specified care, usually for the elderly.
This form of insurance provides policy owners with the assurance that they will be able to obtain the care or products and services wanted, at a cost that is known and can be planned for.
In what type of policy could more than one claim be made?
A A life insurance policy B A disability income policy C A health insurance policy
D B and C
Insurance can be purchased by individuals, groups of people, and businesses. As an agent, you will sell life insurance, disability income insurance, health (also called accident and sickness or A&S insurance), and insurance investments to customers who are individuals, groups, and businesses.
When you become an agent, you will also become a consumer of insurance.
Disability income insurance Disability income insurance pays a monthly benefit to the insured who is sick or injured and unable to work.
Health insurance Health insurance is the broad term used to describe a number of policies that provide health coverage such as dental insurance or prescription drugs.
omissions insurance (E&O), to protect them from claims that may arise when clients are dissatisfied with the service provided.
Why is insurance important? If the income of a person or business is interrupted, or unanticipated costs are incurred, financial ruin is a possibility. Protection against such an occurrence — and peace of mind — is provided by insurance. Life insurance products provide protection against death, disability, or aging (old age). These are referred to as predictable risks.
Life insurance provides protection against financial loss resulting from death.
Disability income insurance provides protection against financial loss when income can no longer be earned because an illness or injury prevents the insured from working.
Health insurance provides protection against financial loss due to unexpected or extreme health care costs that fall outside provincial government healthcare plans, or medical conditions.
Long Term Care insurance provides for protection against long-term care charges that may be required as a result of aging.
Which of the following is not a predictable risk? A Bankruptcy
B Old age C Death D Disability
The life insurance agent is responsible for selling policies and providing service to new and existing clients. As an agent you must be able to accurately and thoroughly answer what we consider to be THE big questions that clients ask:
1. How are you qualified to sell life insurance? 2. Why do I need insurance?
3. What type of insurance do I need? 4. How much insurance do I need?
5. Which insurance company is best for me? 6. How do I apply?
7. How do I get my money?
The answers to these questions form the basis for this insurance module. First, you will learn about the legal and moral qualifications to become a life agent. Then, you will learn about the risks that insurance addresses and the types of policies best suited to the needs of your client. Then, you will assign a dollar figure to the amount of coverage the client needs.
Coverage Coverage in an insurance contract is the face amount of a life insurance contract or the benefit received from a disability income insurance contract or the reimbursement amount of a health insurance contract.
You may also be expected to provide guidance to your client about which insurance company is best for the type of policy the client needs. Once the insurer is selected, you will work through the process of the client applying for insurance, and how the risk posed by the client is assessed by the insurer in the process of underwriting.
Finally, you will learn how a claim is made. The claim makes good on the promise of the policy, and for life insurance it is the final step in the insurance process.
The Life Insurance Profession
The life insurance profession has six key players:Agents; Brokers; Insurers; Regulatory agencies; Courts; Governments.
Agents
Agents are able to sell insurance to individuals, groups, and businesses when they have signed an agency contract with an insurance company. The agent may sign an agency contract that does not give the agent the right to sell products of other insurance companies not approved by the company with whom the agent has signed the contract. If the agent can sell only the products of one company, then the agent is considered to be a “captive agent.” In Canada, Sun Life is a company that has captive agents.
The agent may also sign a contract with a number of companies. The agent then represents the products of that company or companies to new and existing customers. We will explore the concept of agency in depth in the following section of this book. Manulife — Canada’s largest insurer by assets — does not use captive agents but uses brokers and their agents to distribute products. Some companies have captive agents and also use the brokers’ distribution network to distribute their products.
The agent’s duties will be:
To find people who wish to apply for insurance;
To help each one assess which insurance product is best for his or her need and how much insurance is required;
Agency contract The agency contract is the contract between the agent and the insurer or insurers whose policies the agent will sell.
To work with the applicant on correctly completing the application form;
To collect the initial premium for the policy; and To deliver the policy.
What binds an agent to an insurer?
A The process of underwriting
B The agency contract
C The existence of a broker D The Uniform Life Insurance Act
Agents sell policies and provide service to their clients before and after a policy is issued. This is called pre-sale and post-sale service. Pre-sale service includes understanding the insurance needs of the client and designing an insurance strategy that helps the client meet his or her objectives. Post-sale service ensures that the insurance in place accurately addresses client needs as changes occur in the client’s life. Events that would require re-evaluation of a policy include the birth of a child, marriage, divorce, death of a spouse, or increasing — or decreasing — financial obligations.
What kind of service does the agent provide when a client becomes divorced?
A The agent sends a note of condolence.
B The agent provides follow-up service to the client by checking to see whether any changes in policies are required as a result of the divorce.
C The agent provides pre-sale service by selling the client a new policy to better suit his or her needs.
D The agent provides pre-sale service to the ex-spouse of the client.
Agents are at the forefront of the industry when it comes to implementing the standards of the profession. It is an agent’s responsibility to demonstrate the highest degree of ethical behaviour.
Ethical conduct of life insurance agents is insured by the rules and regulations of many national and provincial agencies and associations, federal and provincial statutes and regulations, legal precedence, and the codes and bylaws of provincial insurance councils. In addition, the code of ethics established by the Canadian Life and Health Insurance Association (CLHIA) and industry associations provide guidelines for agent conduct. The insurers themselves provide ample guidance to agents as to ethical behaviour.
You should be familiar with those codes and standards of conduct that apply in your jurisdiction.
Failure to adhere to the professional guidelines for agent conduct could expose you to liability claims from clients in which you will have to rely on your errors-and-omissions insurance and will lead to serious conflicts with the regulating bodies of the insurance industry.
Which of the following would not provide a guideline or guidelines for proper conduct by agents?
A Provincial regulators B Federal regulators
C Regulations of the insurer with which the agent has an agency contract
D A ratings organization such as Standard & Poor’s
Brokers
An insurance broker is a person who sells and services insurance policies directly or through agents to individuals, groups, and businesses, and provides consulting or advisory services for insurance or reinsurance. When a group of brokers band together, they form a brokerage. Brokers do not have an agency contract with the insurance companies that they represent. As an agent, you might work for a broker.
Insurers
Insurance companies issue the insurance policies. The companies may be federally incorporated to carry on business across the country or may be provincially incorporated. A provincially incorporated company can operate only in the province in which it is incorporated.
Insurers are organized either as mutual companies, in which the company is owned by its policy owners, or as stock companies. A stock company issues stocks, also known as shares, that are traded on a stock exchange; the company is owned by its shareowners. When a company converts from a mutual company to a stock company, it is considered to be “demutualized.”
Successful completion of this LLQP course
qualifies you to become licensed as an agent by your provincial
Which of the following is a mutual company?
A Manulife, which is listed on the Toronto Stock Exchange
B Clarica, a division of Sun Life, which is listed on the Toronto Stock Exchange
C Equitable Life of Canada, which is a private, independent company
D RBC Financial, which is listed on the Toronto Stock Exchange as part of the Royal Bank of Canada
In addition to distributing insurance through agents and brokers, insurers also work with associations, such as the Canadian Bar Association, or groups of individuals who share common interests, relationships, or connections, such as the alumni of a university. Most groups are comprised of employees of a company.
Due to their size and other underwriting factors, insurers are able to offer discounts to these groups on:
Term insurance; Disability insurance; AD&D insurance; Medical plans; Auto insurance; Home insurance; Travel insurance.
Other Sales Channels
Fraternal organizations provide insurance to their members. Fraternities have traditionally been groups of people who shared the same religion, profession, or ethnic origin. Now, some fraternities are open for membership to anyone who is interesting in enjoying their insurance or social benefits. In Canada, the Foresters (previously known as the International Order of Foresters) is a well-known fraternal organization.
Finally, benefits consultants are licensed to sell and distribute insurance on behalf of the insurers with whom they work.
Benefits consultants advise employers about the management of their group insurance. Their goal is to fully understand their client’s business objectives to enhance their investment in human resources.
Underwriting Underwriting is the process by which the insurer assesses the risk posed by the life insured (if a life insurance policy) or policy owner (if a disability or health insurance policy) when an application has been made for insurance. The agent provides information that assists correct underwriting.
The management of employers’ group insurance involves negotiations with insurers regarding plan renewals and financial statements and finding the most appropriate insurer based on client-specific selection criteria. Consultants will also monitor plan experience, insurer expenses, and claims management to help ensure that programs remain cost competitive and responsive to market conditions.
Increasingly, consultants provide advice around broader human-resource issues, such as human-rights questions, adherence to labour laws, and coordination with government-sponsored benefits, such as employment insurance.
Employee Assistance Programs (EAP)
Employee Assistance Programs (EAP) are provided by employee assistance firms that work hand-in-hand with insurers. They are not an insurance product, but they are an employee benefit that can form part of an overall group “plan.” EAP provides professional consultation to employees and their families to provide immediate support, education, and access to resources for a wide range of employee needs. Services provided include:
Counselling for stress and dependency problems associated with alcohol, drugs, or gambling;
Medical care;
Legal advice covering family law, bankruptcy, and separation and divorce,
Financial counselling.
Regulatory Bodies
Organizations such as the Canadian Life and Health Insurance Association (CLHIA) transform laws passed by governments and interpreted by the courts into rules for the industry to follow.
The courts interpret and apply the laws passed by governments. In turn, these laws are passed along to the regulatory agencies.
There are 18 separate regulatory bodies in Canada: 12 provincial and territorial regulators, five provincial insurance councils, and the federal government. In general, the provinces regulate licensing and marketing, while the federal
Office of the Superintendent of Financial Institutions (OSFI) ensures that the companies have sufficient assets to honour their policies. Federally, insurers are regulated by the Insurance Companies Act. Provincially, each province has its own Insurance Act. Over the years, the insurance acts of all the common-law provinces have become similar. Collectively, the provincial acts are referred to as the Uniform Insurance Act (an hypothetical act). However, Quebec, which is based on Civil Law, has a different Insurance Act.
OSFI
A federal agency established under the Financial Institutions and Deposit Insurance System Amendment Act to supervise all
federally regulated financial institutions.
