The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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Fewer Insurers Control Market

By: Peter J. Merrick & Andrew Duckman

Barring some unexpected government intervention, the consolidation of the insurance industry that ended the 1990s is over, says Larry Jackson, senior consultant, health and welfare, at ACS HRO Solutions.

As Benefits and Pensions Monitor presents its 2006 ‘Annual Report & Directory: Group Benefits and Pensions,’ Jackson says the major players from that go-round of consolidation seem to be concentrating their efforts on other countries “where they see opportunities for growth, especially getting into the Chinese market.”

The top five from 2000, which had 60 per cent of the market, are now down to a top three which controls twothirds of the market in Canada.

What this means for plan sponsors is that their choices are limited when it comes to carriers.

Jackson also says the focus of these companies has moved from market share to an emphasis on shareholder value. In 2000, the industry made less than $500 million in profit and was averaging less than 10 per cent ROE. Looking at the 2005 results for the top three, they made around $750 million in profit and had ROEs in the 13 to 20 per cent range. “They certainly concentrated on the bottom line.”

For the employer, this means their costs – general administration fees in general – have increased over the last five years, especially with some of the carriers now showing explicit charges for the cost of capital.

Consolidation has not been all bad.

Some claims administration fees may have gone down slightly due to new technology and the economies of scale achieved with the mergers that have gone on, but “in general any reductions that the insurers have made in their own expenses because of getting larger, they’ve used up in terms of developing web-based tools, self-service tools for individuals, and that sort of thing. They haven’t really been passing on the saving to the employers, but hopefully they’re reaching a point where they’re giving better service in terms of web access and that sort of thing.”

Sponsor who use “second-tier providers” have also benefited. These providers are being “forced to spend the money to develop the tools to keep up with the big three.”

However, the shrinking number of providers has made it harder for sponsors to shop around for the best rates. “Now providers are sitting back and saying well, how often have you been to market? Do I want you as a client? They’re being a little more selective in terms of who they’ll quote on.”

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