Big Insurance. Big Problems.

Nelson, Jacqueline . The Globe and Mail ; Toronto, Ont. [Toronto, Ont]13 Aug 2016: B.6.

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ABSTRACT
 
"If you look at who we serve, trying to get at the younger generation - at the millennials who just don't even want to
hear about insurance and really don't understand the importance and the value of insurance," Ms. [Marianne
Harrison] said. "They would never put up with this process that used to exist in terms of how to do business with
us. They wouldn't understand it. They'd say 'Really, this is how it works?' " Insurers say they are just getting started.

FULL TEXT
 
Canadian life insurers have never truly recovered from the global financial crisis that struck eight years ago. If they
want to make a comeback, they're going to have to start winning over people such as Kamil Ali Rextin.

The 30-year-old digital marketing guru could be a dream customer for any financial institution. He's has a master's
degree in business, owns a home in Toronto and is now thinking about starting a family with his wife. As the
couple contemplate children, Mr. Rextin began looking at buying a life insurance policy to make sure his family will
always be taken care of. But after wading through some "dense and opaque" material, he gave up in frustration.

"I don't want to talk to anybody on the phone, I don't want to go in anywhere. I just want to find the information on
my own," he says. "Because I feel like if I go and talk to somebody, they're going to try to sell me on something else
I don't want to buy." He also worries that he'll miss some fine print that will void his policy, leaving his family with
nothing to show for all the effort. So he has abandoned the pursuit.

Mr. Rextin and his generation - technologically savvy consumers with a healthy skepticism about financial
salespeople - are less likely to buy life insurance than their parents ever were. And that's just one of a litany of
issues facing a business that is a crucial part of many Canadian investors' portfolios, yet has fallen on rough
times. The country's Big Three life insurers - Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco
Inc . - represent nearly $100-billion in stock-market capitalization. Yet, all three are still trading below their precrisis
highs. Manulife shares are more than 60 per cent below their peak in 2007.

Historically low interest rates have hammered life insurance companies by eroding their profitability. Low rates
and volatile financial markets make it harder to earn returns on investments that are needed to pay claims. At the
same time, new kinds of financial technology firms are threatening to make the insurance industry less relevant to
younger people who demand simpler and more transparent products.

With no obvious change coming to markets, a strategic shift is under way in the Canadian lifeinsurance
businesses. After years of building their wealth-management arms and expanding in markets such as Asia to drive
higher profits, Canada's staid, stumbling lifecos are turning more focus to wringing profits out of the business
they're best known for: selling life policies to Canadians.

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To regain their appeal, and cut costs, the country's largest life and health insurers are rolling out a string of
changes to how they do business. They've loosened restrictions on marijuana use for policy holders, relaxed the
requirements for rigorous blood and urine testing, introduced rewards for customers with healthy lifestyles and
fitness regimens, built apps that allow customers to manage health concerns and drug prescriptions with their
smartphones and cut the time it takes to process a claim.

Finding growth will be a challenge. Canada's life-insurance market is already developed. Canadians own in excess
of $2.5-trillion worth of individual life insurance, according to the Canadian Life and Health Insurance Association
(CLHIA). That number is even higher when workplace benefits are factored in.

The demographics of some target customers have also undergone a dramatic shift. The next generation of
insurance buyers has more student debt, fewer prospects for full-time employment and, compared with their
parents, is more likely to delay marriage and put off having kids - key life events that have traditionally spurred
insurance purchases.

But with all of this change comes opportunity. Relaxing policies and embracing technological innovation offer the
potential to both entice a new wave of customers and significantly cut costs - keys to extracting profits in an era
when companies can no longer count on robust returns from fixed-income investments.

Canada's big three life insurers all say they are just getting started.

A struggle against low rates

In early June, Dave Johnston stood before a group of investors at the Fairmont Royal York hotel in Toronto's
downtown core.

Projecting a chart onto a screen, the retiring president of Winnipeg-based Great-West's Canadian business
described a growing divide that has reshaped his company - and others - in the years since the financial crisis.

Great-West, Canada's largest individual insurer in terms of annual premium sales, had seen profit growth stall in its
group and individual insurance businesses. Over the previous half decade, the compound annual growth rate for
those units' earnings hovered at just 2.5 and 2.6 per cent, respectively. The wealth management business, on the
other hand, was showing a fiveyear compound annual growth rate of 8.7 per cent.

"Certainly, we've had the headwinds of lower interest rates affecting our individual insurance lines over this period
of time," Mr. Johnston explained. "We would not characterize our individual insurance as a high earnings growth
opportunity, but very steady."

This hasn't always been the case for the country's biggest insurers.

Before the Great Recession, Manulife posted a 22-per-cent compound annual growth rate for earnings in its
Canadian individual insurance business over five years. Today, the company is more focused on the growth of its
global wealth management operations, which account for half of its pretax earnings, according to calculations
done by Peter Routledge, an analyst who covers the sector at National Bank Financial.

He says insurance companies with the potential to expand wealth management operations will have a better

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chance of revenue growth than those solely focused on the life insurance business, sometimes called protection.

"That slow earnings strain is the impact of a disastrous interest rate environment for what I would call the
protection business," Mr. Routledge said, adding in a note to clients that "while the balance sheets of the life
insurers ... have hedged exposure to falling long-term interest rates dramatically in recent years, they have not
hedged against a permanently depressed yield curve."

In the aftermath of the financial crisis, central banks around the world took action, cutting interest rates and
introducing extraordinary measures in a bid to make borrowing cheaper and restart the global economic engine.
But what once seemed a temporary stimulus measure now increasingly looks like a long-term reality. Interest rates
have even gone negative in countries such as Japan and Switzerland. In July, the Bank of Canada lowered its
forecast for economic growth this year, and rates keep dropping.

Executives at the three largest insurers said low interest rates put pressure on financial results in the most recent
quarter. Manulife, which felt the impact most acutely as falling interest rates and volatile equity markets resulted
in a $170-million charge against profit in the second quarter, saw flat growth in its Canadian individual insurance
business. Chief executive officer Donald Guloien called the core earnings "disappointing."

The struggle against interest rates can can show up in many ways. Among other challenges, low rates can depress
earnings, increase the capital that insurance companies need to hold and negatively affect competitiveness.

All of this has added to pressure to kick-start revenue.

In the two decades before the Great Recession, life insurers piled up policy sales, with annual purchases more than
doubling between 1990 and 2009 to $313billion, according to figures from the CLHIA. Then growth stalled. In 2014,
$318-billion worth of insurance was purchased - a 7.4per-cent decline from the year earlier.

In 2015, there were small signs of improvement. Early estimates show that Canadians bought about $330-billion of
life insurance last year from the nearly 100 businesses that sell policies. More than two-thirds of that was
individual insurance purchased by a person or family and the rest was group insurance sold to employees through
companies. Still, sales of both lines have remained relatively flat since 2010, the CLHIA's annual fact book shows.

Slight increases in sales activity can't restore the type of profit growth once returned by robust fixed-income
investments.

Consider a life-insurance policy bought a decade ago, with monthly premiums invested in bonds that comfortably
yielded 6 per cent. Now, the same premiums only yield about half that. Insurers can raise prices on new policies,
but that comes with its own risks.

"If you price it too high, then you're not going to have the sales,

because people can't afford it," said Marianne Harrison, CEO of Manulife's Canadian operations.

"And that's why we're constantly looking at our products. How can we redo products so that we can bring the price
point down from the consumer perspective, but not increase the risk from a shareholder perspective?"

An easier customer experience

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Twenty-six-year-old Maria Legault says she has always been attentive to her financial future.

In June, after meeting a broker at a community event, she purchased universal life and critical illness insurance
from Sun Life.

Youth and good health allowed her to skip the awkward experience of having a nurse come to her house to collect
urine and blood.

"My initial impressions have been very favourable," she said of the experience. Her broker told her that her
application was one of the fastest he'd ever seen processed.

Insurance companies want more customers such as Ms. Legault - and to acquire them at less cost. That's why
they're altering the way they assess, underwrite and communicate with Canadians. They're also expanding their
product offerings.

Sun Life and Bank of Montreal made waves in the spring when they revealed changes to their views on marijuana
use. Sun Life said clients who use marijuana will no longer be charged the same rates as tobacco smokers.

Bank of Montreal ruled that occasional use of the drug - up to two joints a week - would also receive non-smoker
rates on new applications.

Other changes to coverage were already surfacing. In April, Manulife became the first in Canada to offer individual
life-insurance policies of up to $2-million to those who have tested positive for human immunodeficiency virus
(HIV). Weeks later, the insurer reduced the requirements - such as blood and urine testing - usually done for term
life insurance policies up to $1-million, a new approach to invasive testing that other companies have also
explored.

"One of the important pieces, from my perspective, is the ease of doing business with us. That has typically been
one of the biggest pain points that we see from consumers," Ms. Harrison said, recounting the typical lengthy
insurance application system: paper forms, telephone interview, nurse visit for blood and urine sample and a
waiting period of up to 40 days before approval. "It's a cumbersome process."

When Manulife began to use data analytics that track the usefulness of all these steps a couple of years ago, it
found some questions correlated with eventual claims more than others. So, it cut the number of questions on
application forms to about 25 from approximately 40 and slashed phone interviews in half.

Making customers' lives easier comes with an added benefit to the bottom line.

"Because what the customer wants is simple, quick, electronic - all those things will make our processes more
efficient at the same time," Ms. Harrison said.

"So, it really is a win-win for shareholder and for customer at the same time."

A new willingness to embrace technological solutions is also helping on the cost-cutting front.

Earlier this year, Manulife brought to Canada a program that offers savings on life insurance premiums to people

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who can prove they are taking steps to improve their health, by getting vaccinations or going for cancer
screenings, for instance. Called Vitality, the program offers a free wearable fitness tracking device and is meant to
engage and attract new customers. The company also benefits if people live longer, gaining more time to invest
and earn returns.

Sun Life has also introduced predictive models and digital tools that speed the claims process and help advisers
sell services to customers when they are most receptive to it, such as the arrival of a new child, marriage or
retirement.

"It's not just about making it easier to do business with us, it's about having more connectivity," said Sun Life CEO
Dean Connor, adding that the company has many other initiatives under way.

Changes to health insurance technology have also helped to improve the customer experience. Over the past year,
GreatWest Lifeco Inc. has also overhauled its online claims-submission processes, allowing health insurance
customers to file some claims by taking a photo of the bill on their phone, with payments deposited in their bank
accounts shortly afterward. Customers like it and it saves money, Mr. Johnston said.

The next generation of customers looks much different than their parents', says Cameron Rose, a licensed life
insurance agent with Investors Group Financial Services Inc. in Westbank, B.C.

He's 31 years old and about half of his clients are also millennials, or members of Generation Y. Previous
generations seemed to have a clearer sense of their finances earlier in life, he said. "A lot of the Gen Yers, they've
already started a family, or they already have a house, but it's the first time they've really looked at the full
[financial] picture."

Insurers are fighting for business in a weak economy. In 2016, Canada has generated new jobs at the slowest pace
since the Great Recession and household debt levels are near all-time highs.

These conditions don't bode well for selling life insurance, which requires customers to pay monthly premiums on
a product that they might never use.

And there's a demographics issue. Millennials are simply not hitting major "life events" that typically trigger
insurance sales at the same time their parents did.

Priced out of home ownership in many of the country's major hubs, they are settling down later.

"If you look at who we serve, trying to get at the younger generation - at the millennials who just don't even want to
hear about insurance and really don't understand the importance and the value of insurance," Ms. Harrison said.
"They would never put up with this process that used to exist in terms of how to do business with us. They
wouldn't understand it. They'd say 'Really, this is how it works?' " Insurers say they are just getting started.

"You're going to continue to see ever-simpler underwriting rules, ever-simpler application processes for life
insurance," Sun Life's Mr. Connor said. "We have to find ways to use other data - not just blood - to do underwriting
of life insurance. And try to reduce, significantly, the number of days it takes somebody to buy one of our products
in the industry."

Gen Y consumers have been steadily reshaping other industries through their behaviour and buying power. As

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companies such as Netflix, Uber and Airbnb shake up entire models, insurers have said they are watching out for
online insurance sites, mobile apps and even the possibility that Internet giants such as Google and Facebook
might delve into financial services.

Mr. Rextin, the digital marketing guru, who lists one of his extra bedrooms on Airbnb, remains unconvinced that life
insurers can adapt to provide a better experience. "They have all these buzzwords and jargon on top, it makes it
hard to understand what I am buying into," he said. Still, he says he plans to buy insurance eventually. The
company that makes it easiest will get his money.

DETAILS

Lexile score: 1490 L

Publication title: The Globe and Mail; Toronto, Ont.

First page: B.6

Publication year: 2016

Publication date: Aug 13, 2016

Section: Report on Business

Publisher: The Globe and Mail

Place of publication: Toronto, Ont.

Country of publication: Canada, Toronto, Ont.

Publication subject: General Interest Periodicals--Canada

ISSN: 03190714

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 1811048333

Document URL: https://search.proquest.com/newspapers/big-insurance-

problems/docview/1811048333/se-2?accountid=193930

Copyright: Copyright The Globe and Mail Aug 13, 2016

Last updated: 2017-11-23

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