Affected largely by a depressing economic situation and a very volatile market, Sun Life Financial Inc. has decided to pull back from two of its most important and staple operations. This is largely because of its inability to hold on to the traditional model adopted for life insurance. The decision to stop selling variable rate annuities on the southern side of the border along with individual life insurance was taken by the Canadian insurer after a strategic review which was conducted under Dean Connor, its new chief executive. Interestingly, this decision could save the company a hefty amount of $300 million which used to be put aside in order to guard against potential loss.
Both these businesses were core components of the insurance business. In case of death, a lump sum amount is usually paid out by the life insurance company. On the other hand, annuities usually work out as pensions whose benefits are reaped as the policy holders grow in age. However, the economics related to both have changed drastically largely because of the problem of dropping rates. The premiums which are garnered by the insurance companies are invested in long term bonds. The problem arises though with the 30 year US treasury bonds paying out just 3% annually. This makes the job of the insurance provider tougher when it comes to fulfilling obligations on the insurance policies and annuities they have doled out.
As a result of the volatility in the market, insurance providers have to set aside huge capitals as reserves, funds that could have otherwise been invested elsewhere. It is now the strategy of Sun to grow more in group benefits and wealth management, two areas where the risk to the company is considerably reduced. Stock markets haven’t been very reliable, bouncing quite a bit. For example, the TSX in October climbed by 12% but slumped by 2/3rds the very next month. This makes it dangerous for the life insurance providers to invest large amounts of money, forcing them to be satisfied with assets with lower returns, mostly bonds. However, bonds at the moment are providing very low rates.
Decisions on similar lines are being taken by other insurance providers like Standard Life Assurance Co. which had put an end to life insurance division in Canada. Offering life insurance didn’t make any more business sense largely because of the contract sales dwindling to a very low limit.
