September 28, 2008

The Top Life Insurers: Is Bigger Better Or Best?

I love to freak out salespeople. They ask me if they can help me, and I say, "Have you got anything I'd like?" Then they ask me what size I need, and I say, "Extra medium." --- Stephen Wright

Can you imagine 20,000 employees in a head office? That's what we had at Metropolitan Life in New York City the late 1980s --- then the second largest life insurer in North America. Later at National Life, we had less than 400 employees across Canada.

Does biggest mean best? Does bigger mean better?

When Bigger Meant Best
If size did matter, the dinosaurs would still be alive.
--- Wendelin Wiedeking
Years ago, size mattered. The largest organizations were seen as prestigious, desirable, and the places with the best job security. That was then. Now big means compromise. Big means boring. Wal-Mart dwarfs every company in the Fortune Global 500 for the second year. Now size becomes a hurdle because speed matters more than the brakes of legacy. GM dwarfs BMW, yet nimble BMW ranks as Fortune's most admired car company.  

The Exception: Financial Services
For financial services, scale can benefit you because of the hefty outlays for a sound and thriving operations. Here are the main advantages of size for life insurance
  • greater financial strength (to meet promises, grow and weather economic typhoons)
  • lower unit costs (major investments in costly technology spread over more volume)
  • more security mechanisms (privacy, record keeping, redundancy, disaster recovery)
Because regulations and tax rules vary by country, ownership by a super-sized foreign parent doesn't mean much. The Canadian operations are typically subsidiaries that can easily be discarded with minimal impact on the parent. As protection, regulators require that insurers (both foreign and domestic) keep enough assets in Canada to meet the promises made to you.

The Top Five Insurers
The Financial Post 500 ranks the top insurers in Canada each year. Here are the results for 2007, published in June 2008. Here are the top five by revenue
  1. Manulife
  2. Great-West Life
  3. Sun Life
  4. Industrial Alliance
  5. Desjardins
Here is the top 20 (click to enlarge).

You may be surprised at how small some of the big names are. While biggest doesn't mean best for you, bigger often means better. And more peace of mind.

September 21, 2008

The Dangers Of Visiting OSFI's Website

While writing Oblivion: What Happens If My Life Insurance Company Dies?, I found a potentially harmful website from an unlikely source: OSFI. The Office of the Superintendent of Financial Institutions (OSFI), regulates banks and most life insurance companies in Canada. You'd expect their website to be very safe. Maybe it is. 

The Risks
The new Google Chrome web browser spots problems that other browsers miss and explains their concerns:
Of the 1092 pages we tested on the site over the past 90 days, 304 page(s) resulted in malicious software being downloaded and installed without user consent. The last time Google visited this site was on 09/21/2008, and the last time suspicious content was found on this site was on 09/21/2008. 

Malicious software includes 934 scripting exploit(s). Successful infection resulted in an average of 2 new processes on the target machine.
--- Google 
Here is the screenshot.

Protecting Yourself
You can protect yourself by taking precautions
  • up-to-date antivirus software with Internet security
  • up-to-date web browsers other than Internet Explorer (e.g., FireFox, Chrome, Opera)
  • visiting safe sites
Perhaps there are no risks on the OSFI website. Google may be over-reacting, as when this blog was temporarily blocked as spam

Oblivion: What Happens If My Life Insurance Company Dies?

At bottom, any insurance policy is simply a promise, and as everyone knows, promises vary enormously in their quality. — Warren Buffett, Berkshire Hathaway 2004 Annual Report

Warren Buffett reminds us that an insurance contract is merely a promise on a piece of paper. What happens if your insurer sinks in a financial storm?  Who will honour the promises made to you?

 In Canada, several mechanisms protect you
  • regulators
  • bigger insurers
  • consumer protection
Insurance companies are regulated federally or provincially. OSFI (Office of the Superintendent of Financial Institutions), the federal regulator also monitors the banks. The regulators are concerned with solvency and establish minimum requirements . In practice, insurers set aside more than than the mandated minimums. Naturally, tying up more capital lowers the returns for the owners. This is a reason why large foreign life insurers left Canada for higher returns in other countries. You may remember names like Aetna, ING (NN Financial), Metropolitan Life, and Prudential Insurance.

Bigger Insurers
In financial services biggest doesn't mean best, but bigger often means better: solvency requirements and operating costs become less onerous with size. I worked at the following companies which vanished: Crown Life (into Canada Life), Metropolitan Life (into Mutual Life into Clarica into Sun Life), National Life (into Industrial Alliance).

The insurers backing your insurance contracts may have changed. You probably did not suffer. To protect you, life insurance contracts are generally accountable, which prevents new owners from making changes that the original insurer could not make.

Consumer Protection
If an insurer becomes insolvent, you are protected by Assuris (formerly called CompCorp). This is similar to CDIC (Canadian Deposit Insurance Corporation) for your bank accounts.  Regulators require life insurance companies belong to Assuris (here's a full list of members) and Assuris can increase assessments on the solvent companies. 

Assuris covers a wide range of products
  • Life Insurance
  • Critical Illness
  • Health Expense
  • Disability Income
  • Long Term Care
  • Annuities
  • Segregated Funds
  • Group Insurance
Coverage levels vary. For life insurance, your death benefit is protected up the larger of
  • $200,000
  • 85% of the death benefit
So the most you can lose is 15%. Even that loss is unlikely since your policies will likely be transferred to a solvent company which will honour the original commitments. If you're concerned, you can buy coverage for multiple companies but this quickly becomes impractical: a $1 million death benefit would five $200,000 policies from five separate insurers. What if you need $5 million?

If All Else Fails

CDIC is a corporation of the federal goverment but Assuris is only a nonprofit organization. That means "Assuris may not have the capacity to deal with an external event causing an industry-wide failure." (see Assuris Funding). That may alarm you but would the federal and provincial governments watch from the sidelines if an entire industrial collapsed?

There's no way to guarantee that a promise will be kept. There are mechanisms in place to greatly increase the likelihood. And give you peace of mind.


September 14, 2008

Your Trusted Financial Advisor: What You Like/Dislike

Coming together is a beginning.
Keeping together is progress.
Working together is success.
— Henry Ford

As you move along your Financial TRAIL, you rely on advice from experts in risk, accounting, investments and law. The wealthy have 1-3 advisors and have known them for 5-10 years. One advisor is usually the most trusted. Typically, the accountant.

What do you the wealthy want from their most trusted financial advisor? This is what the research organization LIMRA found.

What You Want Advice About
The wealthy ask for help in these areas
  1. Tax advice and income tax strategy (67%)
  2. Retirement planning (63%)
  3. Selecting securities (58%)
  4. Financial planning (55%)
  5. Asset management and allocation (49%)
  6. Life insurance (48%)
  7. Estate planning, leaving an inheritance (47%)
  8. Funding children's education (34%)
  9. Managing distribution of retirement funds (32%)
  10. Use of loans, mortgage and credit (26%)
What You Like
Here's what the wealthy like about their trusted financial advisor
  • Warm, personable, friendly
  • The right level of detail
  • Constructively challenges your ideas
  • The right balance between broad general knowledge and deep knowledge in a specific financial area
    This is good news. There are gender differences. Women prefer working with a generalist and men prefer specialists. While many things are done well, the wealth identified weaknesses too.

    Areas For Improvement
    The good things take care of themselves. We want to find all the negatives. — Wayne Huizenga
    The wealthy want their trusted financial advisor to improve in the following areas
    • Advise you proactively
    • Interact with you more frequently
    • Make aggressive recommendations
    • Service you with a team of specialists
      The demand for aggressive recommendations puzzles me since you primarily ask for tax advice and income tax strategy. Can this be right? When I ask, accountants say yes. Even in Alberta, the province with the lowest taxes, you are willing to take more risk to get more after-tax income.

      We've looked at a technique earlier: "10-8" Insured Leveraging, which combines the tax advantages of life insurance, and borrowing to investment. Your accountant applies the resulting tax deductions for your benefit — which makes you like them even more. 

      Links and Sources

      September 7, 2008

      The Dread Of Going To A Bank For A Loan

      You can turn your home into a bank machine with a home equity line of credit (HELOC). You can generally borrow up to 80% of the equity at prime (currently 4.75%). You skip the hassle of getting approval for loans. You then have instant access to money for investing or spending.

      This flexibility is appealing if you have self-control. Otherwise, gorging at an all-you-can-borrow buffet, can cost you more than ordering off the menu.
      Bank: "We can lend you $900,000." (meant as an employee benefit)
      Employee: "No you can't." (meaning no desire for more debt)
      That Was Then
      I called the full-service bank which holds our home mortgage.  They were happy when we chose them and thanked us with a gift basket of coffee and a mug with their logo. Over the years, we've paid tens of thousands of dollars in interest. And they've become less friendly. To maintain preferred rates when we renewed our mortgage in 2003, we had to get:
      • a bank card
      • a full service bank account (fees waived for six months)
      • an unsecured line of credit
      • a credit card
      For expediency, we did. We didn't use any of these services but now looked like better revenue streams. Last year, we got a letter from our personal banking representative who was to call to discuss additional services. She never followed up on this commitment, which was fine. We didn't want anything else. 

      This is Now
      To workers, I'm just another drone.
      To Ma Bell, I'm just another phone.
      I'm just another statistic on a sheet.
      --- Bob Seger, 
      Feel Like A Number
      I figured the bank would welcome an opportunity to lend us even more money. I phoned their call centre to get a HELOC. While there was no charge for setting up a mortgage, there are fees of hundreds of dollars to establish a HELOC. I wanted them waived for four reasons
      1. the bank already had our mortgage and knew about our property
      2. we we had been a good profit source over the years
      3. we were giving the bank an opportunity to lend us even more
      4. we would only have one HELOC, shutting out competition
      The call centre did not have the authority to waive fees. They arranged to have an authority in our home branch call me. No one did. When I called the phone centre later, they found no record of this commitment. I'd need to visit a branch personally. 

      First Visit In Five Years
      I went to the nearest branch, waited a while and then talked to a representative. Banking has changed. In the old days, you were a good customer if the bank had the potential to make money from you. Increasing your capacity to borrow made them happy. Now you're a good customer if you're already a revenue stream and have multiple products (which makes switching inconvenient). To start, you need a bank account --- each type has ongoing charges of some type. 

      I asked that the HELOC setup charges to be waived. This question went unanswered as the representative constructed an example of how we could
      • move our mortage there (just renewed at prime less 0.10%)
      • buy an investment property
      • invest: borrow at prime (4.75% tax deductible) and earn 7% (how can you lose?)
      I listened patiently. By the time he finished, there was only $80,000 left. That was for future borrowing for emergencies !?!

      No Gift Basket
      I asked about setup fees again and finally got an answer. If I bought additional products (starting with a GIC with lousy rates), upgraded to credit card with fees and started using the services we had, the setup fees might be reduced by 50%. How could I refuse such a deal? Easily, since a HELOC is merely a "nice to have" item.

      I thanked the rep, closed the old line of credit and cancelled the old credit card. Only the mortgage remains. That's fully open and can be easily moved. But may require a personal visit elsewhere. 


      September 1, 2008

      Quotable Quotes: The Seven Habits Of Highly Effective People

      Sow a thought, and you reap an act.
      Sow an act, and you reap a habit.
      Sow a habit, and you reap a character.
      Sow a character, and you reap a destiny.
      — Charles Reade

      The Seven Habits Of Highly Effective People changed my life. I saw Stephen R Covey's book in the library in December 1997. I rarely read one book a year but I liked the title and had time during the holidays. This was the right book at the right time. I gave copies to my staff and we discussed the content as a team. Over the years, I took two 3-day seminars (Seven Habits and Principle-Centered Leadership) and saw Covey live twice in daylong seminars. I even got an autographed copy of the The Seven Habits through a connection. I've used a Seven Habits organizer for years. I'm only missing the t-shirt!

      Rather than summarizing the Seven Habits, I'll give you an overview using quotations I've collected over the years.

      The Habits
      Successful people have the habit of doing things failures don’t like to do. They don’t like doing them either, necessarily, but their disliking is subordinated to the strength of their purpose.
      — Albert E Gray

      In sequence, the habits are
      1. Be proactive
      2. Begin with the end in mind
      3. Put first things first
      4. Think win/win
      5. Seek first to understand, then be understood
      6. Synergize
      7. Sharpen the saw
      Habits 1-3 make you independent. The next three (4-6) make you interdependent (dependent on others). The seventh makes you whole. More recently, Covey added an 8th habit: Find your voice and help other find theirs.

      #1: Be Proactive - The Habit of Personal Vision

      We have the opportunity to choose who our children's parents will be
      Between a stimulus and our response lies our power to choose based on four unique human endowments
      • self-awareness: our capacity to look at ourselves
      • imagination: our ability create with our mind hings we cannot see with our eyes
      • conscience: our internal guidance system
      • independent will: as Mahatma Ghandhi said, "I will not let anyone walk through my mind with their dirty feet"
      Since we can choose our response, we have response-ability.

      #2: Begin With The End In Mind - The Habit of Personal Leadership

      Plans are worthless, but planning is invaluable
      Peter Drucker
      Imagination is more important than knowledge.
      Albert Einstein
      When we pick up one end of the stick, we pick up the other.
      Stephen R Covey
      He who has a ‘why’ to live for can bear with almost any ‘how’.
      --- Friedrich Nietzsche
      We create everything twice. A mental creation becomes a physical creation. A blueprint becomes a building. Athletes call this visualization. They see, feel and experience in their minds before doing.

      You ask two questions:
      1. What you want to be (your character)?
      2. What do you want to do (your contributions and achievements)?
      You develop a creed, philosophy or mission statement to focus on matters (separately) to yourself, your family and your work unit (e.g., department or company). Many mission statements are boring and unmemorable — they look impressive but don't guide daily decisions. Here are better examples:
      • We just try to build and sell the best cares we know how. Then back them up with the kind of service we'd like to get ourselves — Saturn Cars
      • IBM stands for three things: the dignity of the individual, excellence and service.
      • To seek out New Life and New Civilizations — Starship Enterprise (1966)
      • We share. We care. And we wear underwear. — Sharma family with son was age 3
      #3: Put First Things First - The Habit Of Personal Management

      Things which matter most must never be at the mercy of things which matter least.
      We are a society of notoriously unhappy people — people who are glad when we have killed the time we are trying so hard to save.
      Erich Fromm
      You can say ‘No’ and smile only when there is a bigger ‘Yes’ burning inside of you.
      Stephen R Covey
      It is useless to desire more time if you are already wasting what little you have.
      James Allen

      #4: Think Win/Win - The Habit of Interpersonal Leadership
      If I give you a pfennig, you will be one pfennig richer and I'll be one pfennig poorer. But if I give you an idea, you will have a new idea, but I shall still have it, too.
      Albert Einstein

      The road is better than the end.
      — Cervantes

      What do we live for, if it is not to make life less difficult for each other?
      George Eliot
      If you have a scarcity mentality, you think that if someone gets more, you get less. That's true with pizza and Belgium chocolate, not with life itself. With an abundance mentality, you see there's enough for everyone and there's more for all if we work together.

      #5: Seek First To Understand, Then To Be Understood - The Habit of Communication
      He who thinks all mankind is vile is a pessimist who mistakes his introspection for observation.
      William George Jordan
      Judge men not by their opinions, but by what their opinions have made of them.
      — Georg Christoph Lichtenberg
      If you don’t have confidence in the diagnosis, you won’t have confidence in the prescription.
      Stephen R Covey
      Farming looks mighty easy when your plow is a pencil, and you’re a thousand miles from a corn field.
      Dwight D Eisenhower
      #6: Synergize - The Habit Of Creative Cooperation
      Our ability to reach unity in diversity will be the beauty and test of our civilization.
      Mahatma Gandhi
      Simply put, synergy means that 1+1 > 2: the result is more than the individual contributions.

      #7: Sharpen The Saw - The Habit Of Self-Renewal

      To keep a lamp burning we have to keep putting oil in it.
      Mother Theresa

      I've been in this business 36 years. I've learned a lot, and most of it doesn't apply anymore.
      Charles E Exley
      The richest soil, if uncultivated, produces the rankest weeds.

      Reading is to the mind what exercise is to the body.
      Joseph Addison

      If a man empties his purse into his head, no man can take away from him. An investment in knowledge always pays the best interest.
      Benjamin Franklin
      Sadly, it's often easier to work longer hours than to take time for preventative maintenance, and to keep doing what we're doing rather than to learn a different way.

      Will you learn anything radical in the Seven Habits? Probably not. You'll find similar ideas in the works of predecessors like Dale Carnegie and Napolean Hill and contemporaries. I like the way Covey packaged the ideas and explained them in ways that are easy to remember.

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