September 21, 2008

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.



Anonymous said...

This is unlikely to happen. However, if there is concern about the ability of ANY insurance company to pay claims, every State insurance commissioner has the authority to essentially merge the assets of any troubled insurer through a takeover by more solvent insurers. This method has been used successfully and repeatedly to prevent the default of even one payment of a death claim in over a hundred years in the United States and to make sure that every in-force policy is honored based on the original terms and conditions.

Promod said...

Thanks for your comment, Byron. The process is different in Canada but the results are similar: the promises made in the policy contracts are kept and claims get paid eventually.