Who’s Insuring Your Insurance?

The possibility of losing any portion of your benefit due to your insurer’s insolvency has probably never crossed your mind. Why should it? After all, we live in a country with a carefully regulated and stable financial services industry. As a result, I think it’s unlikely that your insurer will become insolvent. However, there is a risk, albeit a very small one, and it has happened three times.

In 1992, Les Coopérants became the first Canadian insurance company to become insolvent. This was followed by Sovereign Life in 1993 and Confederation Life in 1994. This affected over 1.1 million Canadian policy holders and over 2.1 million employees insured through employer group plans (10% of the Canadian population).

Fortunately, very few people were negatively impacted. Thanks to industry guarantees, 96% of Sovereign Life clients had no loss of benefits. Of the 4% remaining, no one lost more than 10% of their original benefit. When the largest of the three, Confederation Life, became insolvent, its policy holders eventually retained 100% of their benefits.

So what protection do you have if your insurer becomes insolvent? 

Canadian policyholders are protected by Assuris if their life insurance company should fail. Founded in 1990, Assuris is an insurance industry funded organization designated by the federal Minister of Finance under the Insurance Companies Act of Canada, and specified in the Quebec Règlement d’application de la Loi sur les assurances. Every life insurance company authorized to sell insurance policies in Canada (except fraternal benefit societies) is required to be a member of Assuris as long as they have in-force policy holders. Benefit guarantees are funded by a large cash reserve and if required, additional member company assessments. As a result, Assuris has the capacity to deal with any failure.

Assuris protects policy holder benefits by guaranteeing up to a fixed maximum amount or 85% of the total (whichever is higher) of the promised life, disability monthly income or health insurance benefits and ensuring a quick transfer of policies to a solvent company. Assuris also guarantees cash values, critical illness, long term care, segregated funds, TFSA’s, and annuities. The Assuris guarantee on accumulated values is 100% up to a $100,000 maximum.

It’s important to understand that Assuris protection applies separately to each insurance company and in the event of insolvency the maximum guarantees are applied to the combined total of all similar benefits with that insurer.

Life insurance policies provide a good example of how Assuris would apply their combined maximum guarantee. If you owned separate term life and whole life polices with the same insurer, the benefits would be added together (death benefits) to determine your guaranteed benefit amount.

The current Assuris maximum guarantee for death benefits is up to $200,000 or 85% of the total, whichever is higher. If you owned a $100,000 term life policy and a $50,000 of whole life policy with the same insurer, you would be guaranteed the full $150,000 benefit as it falls below the $200,000 maximum. However, if your total combined death benefit with the insolvent insurer was $500,000, you are guaranteed 85% of the total for a $425,000 maximum.

Remember, the Assuris guarantees are merely your worst case scenario. It’s possible that you would retain 100% of your benefits through a liquidation of the insurer and the assumption of your policy by other solvent insurers. This is what happened to Confederation Life policy holder benefits. Assuris partnered with the regulator and the liquidator to leverage lessons learned in previous insolvencies and the result was full recovery for policyholders.

The current Assuris guarantees are as follows:

[Source: Assuris September 2011]

If the possibility of losing even a small amount of benefit is a genuine concern, there are a few ways you can eliminate your risk.

One tactic is to avoid having all your eggs in one basket. By purchasing policies with different insurers at benefit amounts at or below the Assuris maximums, you can retain 100% of your benefit should an insurer become insolvent. However, this tactic could easily double your insurance costs.

For example, if a 42 year old male non-smoker bought five $100,000 10 year term life policies from five different insurance companies, he would pay $823 per year. However, a single $500,000 policy from one company would cost only $405 per year. The five separate $100,000 policies would be 100% protected by Assuris, while the single $500,000 policy is guaranteed at $425,000 (85%).

Another approach is to match the 85% guarantee with your actual benefit need by purchasing more than you actually need (if you can). If your insurer becomes insolvent and you cannot recover more than the 85% Assuris benefit guarantee, you will at least retain an amount equal to your original need.

For example, assuming an actual life insurance need of $500,000, our 42 year old male would purchase a single $588,500 policy for $469 per year. If the insurer became insolvent, Assuris guarantees 85% of that benefit which is equivalent to $500,000 of coverage (the actual need). While this may solve the benefit amount problem, you end up paying much more for your insurance. In addition, it may not be possible to over insurer yourself on policies with income based or fixed amount benefits maximums.

Government regulators and Assuris have learned from the insolvencies of the early 1990s and closely monitor Canadian insurers. While it’s not a complete impossibility, I think it’s unlikely that you would lose any portion of your insurance benefit due to an insurer’s insolvency. That said, I still think people need to know the Assuris benefit guarantees.

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more before speaking to an insurance agent, The Canadian Bar Insurance Association (CBIA) offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local CBIA insurance sales representative who can assist you with insurance protection questions and needs. For information on Assuris guarantees, you can visit www.assuris.ca.