How safe are your investments with
a life insurance company

Peggy Steele

Every now and then, I hear from nervous investors who are fretting about the stability of the life insurance company they have invested their money in. They have read scare stories in the press written by journalists who frankly have no understanding of the protective measures in place. Nor do they have an inkling of why insurance companies take the actions they take. One fear mongeror I had lunch with, went on at great length about how Canada’s largest insurance company’s shares were down, and this company was on the brink of disaster. “They are about to ask for a bailout,” he seriously intoned. Well, that was a couple of years ago - and guess what? Nothing happened. The sky did not fall.

In his story titled, Strength Solvency Stability, Paul Goldstein said, “in certain circumstances, a drop in share value of a life insurer may be due to its actions to secure the safety of its policyholders. To maintain adequate capital, a company may take actions that will temporarily reduce its reported earnings, such as moving more assets to its reserves, issuing more shares, or cutting dividends to shareholders. The shareholders may lose in the short run, but the policyholders gain security.”

Who are the Canadian insurance-safety watchdogs?

OSFI (Office of the Superintendent of Financial Institutions) is an independent government agency that reports to the Canadian Parliament through the Minister of Finance. It has the responsibility for regulating and supervising federally regulated insurance companies. This agency assesses the soundness of an insurer’s financial position through a requirement known as the “Minimum Continuing Capital and Surplus Requirement (MCCSR).

Basically what it means is, OSFI requires insurers to set aside sufficient surplus capital to absorb unexpected losses, cope with market volatility in economic downturns, changes in interest rates, fraud, management, legal, and all operational and business risks etc.

OSFI expects insurance companies to maintain a surplus (MCCSR ratio) of 180-200 per cent. In Sept., 2009, the average ratio for insurers in Canada was 223.66 per cent. The company my friend was spouting off about is currently enjoying a surplus ratio of 250 per cent.

Every federally regulated life insurer must file the MCCSR return quarterly. The returns must be verified by life insurer auditors and appointed actuaries, who must sign an opinion stating that they followed the OSFI rules. These persons are held responsible to the professional code of conduct of the Canadian Institute of Chartered Accountants and the Canadian Institute of Actuaries. OSFI may inform those institutes of any false declarations.

If OSFI sees a MCCSR ratio decreasing, a number of steps are taken to increase the monitoring of the life insurer. OSFI requires the company in question to provide plans to correct the situation and improve its ratio.

At the first sign of potential problems, OSFI establishes a four-stage progressive warning system:

1. Stage One is an early warning flagging a company’s financial condition.

2. Stage Two alerts to a risk to financial viability or solvency.

3. Stage Three casts the company’s financial viability in doubt;

4. Stage Four declares non-viability and insolvency imminent.

At this stage, OSFI will have completed its regulatory duties and will hand the responsibility of protecting the policyholders over to Assuris. (The last time this occurred was 18 years ago when I entered the business. Confederation Life was the company in question.)

Assuris, formerly known as Comcorp, was founded in 1989. It is a not-for-profit organization funded by the life insurance industry and endorsed by the Government of Canada. Its mission is to mitigate the impact on Canadian policyholders of the financial failure of a member life insurance company. Its role is to protect policyholders by minimizing the loss of benefits, and ensuring a quick transfer of their policies to a solvent company.

And that is exactly what happened with Confederation Life policies. Confed’s policies were taken over by other companies and life went on. Policyholders did get 100 per cent of their value returned to them.

Speaking at a convention of financial brokers in May, 2009, Josee Rheault, Assuris vice-president said, “Assuris has access to an immediate liquidity fund of $120,000,000 to fund insolvency claims, and it has the legal authority to collect $4.5 billion from its members to deal with insolvency claims.” She continued, “in a worst-case scenario, Canadian policyholders would have 85 per cent coverage for guaranteed values in excess of prescribed minimum amounts.”

In the wake of the Confederation Life fiasco, OSFI has been tightening its regulatory and supervisory practices to the point that it is highly unlikely a federally regulated life insurer will ever again be allowed to deteriorate to the level that Confed did.

It has to be said here that I have only invested my clients’ money in segregated funds. Seg. funds offered only by insurance companies, are “segregated” from the general assets of the company. In the unlikely event a company goes under, segregated funds are not affected. In the case of Confederation Life, for instance, all seg. fund owners received all of their money. They did not lose one red cent.

Paul Goldstein said, “we have had here in Canada the opportunity to develop one of the most rigorously regulated financial service industries in the world.” Goldstein is confident that the OSFI rules and processes combined with the protective role of Assuris will safeguard Canadian policy policyholders from the possibility of losing any guaranteed benefits from their life insurance company.

The above was edited for space and adapted from a story written by Paul Goldstein, BA, CFP, CLU, CH.F.C., TEP. A more expansive version was published in the June 2010 Forum Magazine for financial advisors. Goldstein can be reached at: paul@paulgoldstein.com

Peggy Steele is an independent financial broker associated with Mid Park Financial Corp. To discuss your retirement planning with investments that provide both safety, guaranteed bonuses and guaranteed income for life contact Peggy at 613-256-6762, or coadycreek@xplornet.com .