Group Insurers Deal With Double-whammy
Bear markets and soaring drug costs are putting increasing pressure on Canadian group insurers listed in Benefits and Pensions Monitor’s 2003 Directory of Group Insurers (see Page 27). Plan sponsors facing the doublewhammy of watching investment markets delay the retirement plans of their members and higher costs as these aging workers make increasing demands on their benefit plans are making greater demands on their providers to help them address these challenges.
That the bear market has had a negative impact on the industry is not news to anyone, says Christopher Cartwright, Manager, Market Strategy, Group Savings & Retirement, at Standard Life.
For sponsors of Defined Benefit plans, Defined Contribution plans or both, “when returns go south, it does not help a sponsor or member achieve the goal of a comfortable retirement,” he says. However, the question is whether or not the experiences since the tech bubble burst will “lead us towards wiser decisions the next time.”
The hope is, he says, that the “typical swings between extremes of fear and greed will stabilize around reasonable, sustainable expectations. We look forward to seeing more confident plan members taking responsibility for, and making informed choices about, their retirement plan.”
However, this requires more emphasis on the “constant challenge” of helping members understand their investments and making good choices, says Bill Sipes, marketing director at Manulife Financial. Members must understand the impact of the lower growth prospects for their retirement savings and either adjust these savings or their expectations of retirement lifestyle.
Plan sponsors today have “heightened sensitivity to these needs” and are working to help them help their employees understand and utilize their plans effectively.
Harrison Robbins, Vice-president, Pensions, at Maritime Life, thinks those who are discounting DC plans now because of market uncertainty are reacting too quickly. “Many forget the long-term investment advantages of well-diversified portfolios, especially for younger members with 20 or more years to invest.’ Even retiring DC members with a diversified portfolio shouldn’t be far off from where they would have been in a DB plan.
On the group life and health side, the over-riding issue is costs, especially the rising costs of drugs and their impact on benefit plans.
Rob Hiscock, Vice-president, Group Marketing, at Maritime Life, says preference shifts are part of the reason for increased costs for drugs. Preference shift mean members are switching from older, less expensive treatment to newer, more expensive treatments. He cites the treatment of arthritis as an example. Plan members who used Naproxen, which cost 45 cents per day, are now using Celebrex or Vioxx which cost $2.50 per day.
Issue Is Health
However, cost is “just a symptom. The issue is health,” he says. The solution requires “a fundamental shift in thinking” towards changing individual behaviour to take more responsibility for personal health.
Andre Simard, Vice-president, Sales, at Desjardins Financial Security, notes the trend towards flexible benefits – which large sponsors started using more than 15 years ago – has accelerated over the past five years, driven in part by escalating drug costs. However, he cautions the switch to a flexible plan should really be carried out to meet the “changing lifestyle needs of employees.”
The industry is also facing the issue of consolidation. In the first months of 2003, bids were made for Canada Life by Manulife and Great-West Life and Liberty Health was acquired by Maritime Life.
But Joan Johannson, Group Marketing & Business Development Solutions Vicepresident, at Canada Life sees some longterm benefits from industry consolidation. The retail consumer market shows “that the emergence of competing giants can lead to an even more focused battle for future growth.” She points to the decades long struggle between Coca-Cola and Pepsi which has lead to “increased creativity and a rapid proliferation of products.” There is an “embedded potential,” within the merger activity, for “new investment within the industry and the creation of an even better selection of plan alternatives.”
And, for regional players like Desjardins Financial Security, consolidation has created opportunities. Simard says they are trying to take advantage of some of the impacts that will emerge from those mergers and acquisitions. As a smaller carrier, they can take advantage of their size to “respond better to the needs of our clients.”
Finally, Cartwright warns about “the activism of the regulators” which brings “both hope and fear.” While any initiative to harmonize the regulatory regime is welcome and long overdue, “past experience suggests that ‘new and improved’ regulation is not always a spur to better retirement plans. We may be at a cross-roads of evolution: continued progression of more education, empowerment, and better member decisions versus less choice being granted by risk-averse sponsors as they take back control of plans that are perceived to be too messy, burdensome, and risky.
“The real test will be to see if, five or 10 years from now, both plan sponsors and members are more satisfied with the results of their group retirement plans or if they are facing off in court over failed expectations. There are no miracle cures or surefire shortcuts, but the good news is that, through our own decisions and actions, each of us can contribute towards a saner, more common sense approach that we all can live with in the long term.”
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