Insurance industry attractiveness
Canada is the largest country in the western hemisphere, and the second-largest country in the world in terms of area. It has a population of around 35 million, and ranked 11th in the list of the countries sorted by GDP, with real GDP reaching US$1.36 trillion in 2011, according to Statistics Canada. Canada is among the top 10 countries globally in terms of total insurance premium volumes (in US$). The insurance industry in Canada is open to foreign competition and companies have adequate access to capital resources. The industry is highly regulated, with regulatory responsibilities divided between the federal government and the governments of each of Canada’s 13 provinces and territories.

The Canadian insurance industry (including the life, non-life, and personal accident and health insurance segments) registered growth over the recent years, although at a reduced rate due to continuing uncertain economic and market conditions. The value of the total gross written premium in the Canadian insurance sector increased at a CAGR of 4.08% during the 2007-2011 period, from CAD80.14 billion (US$74.95 billion) in 2007 to CAD94.06 billion (US$95.14 billion) in 2011.

The industry is mainly dominated by the life segment, with a 40.5% share of the total gross written premium, followed by the non-life and personal accident and health segments with shares of 38.9% and 20.7% respectively in 2011. The life insurance segment is highly concentrated, with the top three insurers accounting for 71% of the total gross written premium, unlike the non-life segment where the top 10 insurers accounted for around 54% of the total written premium in 2011. In terms of distribution channels, the Canadian insurance industry is highly dependent on agencies and brokers.

The Canadian insurance sector is currently facing several challenges: subdued economic growth, volatile market conditions, low interest rates, major catastrophe-related losses, and a growing regulatory burden. The industry is in a transition phase, with a difficult underwriting environment being faced by industry operators. After going through a phase for several years, during which policyholders benefited from falling prices, increased capacity and improved coverage terms, insurers are beginning to take a more disciplined approach to underwriting, which is expected to drive rates up in the coming years.

The merger and acquisition (M&A) activity in the Canadian insurance industry has continued to rise as more carriers and brokers sought to increase their market shares and drive premium growth. The majority of deals involved brokers and managing general agents. Additionally, demutualization in the non-life segment, initiated by the Economical Mutual Insurance Company in 2010, is expected to result in consolidation as companies with access to new capital will strive to build scale and efficiency by acquiring smaller insurers.

Given the challenges confronting insurance providers in Canada, industry growth is expected to remain stable at a CAGR of 4.04% over the next few years. This growth will be sustained by firming prices (mainly in the non-life segment), product innovation, and more sophisticated distribution arrangements, as well as expansion in overseas markets.

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Segment Outlook
The Canadian life insurance segment plays a vital role in Canada’s economy, with assets of CAD366.72 billion (US$370.94 billion) providing a wide range of financial security products. This pool of capital is an important source of long-term investment capital for the economy. The gross written premium of the segment rose from CAD33.18 billion (US$ 31.03 billion) in 2007 to CAD 38.07 billion (US$ 38.52 billion) in 2011, recording a CAGR of 3.5% during the 2007-2011 period. The industry employs 139,000 people across the country and manages over two-thirds of Canada’s private pension plans, according to the CLHIA.

The Canadian market for life insurance products is mature and oligopolistic in nature, with three large groups (Manulife, Sun Life and Great-West Life) together controlling about 71% of the gross written premium in Canada in 2011. The top 10 competitors account for more than 90% of the gross written premium. The ownership structure of the industry went through a rapid change more than a decade ago, following a wave of demutualization among the largest operators to gain better access to the sources of capital growth, resulting in the industry consolidating around a few very large insurers. There are 58 life insurance companies, both domestic and foreign, which also provide health insurance services. Canadian-owned companies control around 85% of the segment’s assets.

Canada’s major life insurers are global leaders, with large and growing operations in the US, Europe and Asia. The three largest Canadian life insurers are among the top 15 in the world in terms of stock market capitalization. The Canadian life insurance segment’s minimum continuing capital and surplus requirements (MCCSR) ratio stood at 212%, significantly above the OSFI’s requirement of 150% as of 2011. The federal government, through the OSFI (the Office of the Superintendent of Financial Institutions), supervises federally incorporated insurers, as well as foreign insurers.

Canadian life insurance providers are facing a challenging environment due to the uncertain economic climate and a highly competitive market. Growing competition from both domestic and foreign life insurers continues to strain the operating results and requires an increased focus on cost efficiencies and product innovation.

Low interest rates and volatile equity market conditions are also prompting companies to re-examine their products and pricing strategies. The low interest rate environment increases the spread compression risk for existing products, and efforts to increase the sale of universal life insurance and fixed and variable annuities have been affected by re-pricing initiatives. The re-pricing initiatives are aimed at lowering the risk by readjusting the premiums, as per the risk involved in the products offered. Also, low interest rates and unpredictable equity markets have an impact on insurers’ hedging costs and reserves.

Given the above challenges, insurers will try to control costs by streamlining cost structures and focusing on consumer behavior, risk scenarios and regulatory changes when developing new products and services. Overall, the growth in Canada’s life insurance segment is expected to register a flat CAGR of 3.8% in coming years that will be maintained due to the expansion of the pension market, favourable demographic conditions and an improving economy. Brand awareness, advertising campaigns and a more coherent distribution strategy, along with lower-risk and less capital-intensive products, are expected to support growth in the future.

Distribution channels

Among the different channels used by Canadian insurers to market life insurance products, agency networks were the leading distributor, holding a 61.5% share of total business commission (including both renewal and new business commission). With their large networks spreading across the country, agencies also enabled non-life insurance companies to increase the penetration of their products, although overall written premium generated through agencies declined from CAD8.84 billion (US$8.27 billion) in 2007 to CAD8.48 billion (US$8.57 billion) in 2011. This was mainly due to the emergence of more cost-effective distribution channels such as e-commerce. The other main distribution channels included insurance brokers, direct marketing and bancassurance.

Brokers were the second-largest distribution channel for life insurance in Canada, accounting for 32.5% of the total business commission earned in 2011. Due to the strong countrywide distribution network and high customer confidence, insurance brokers play a vital role in insurance distribution. Nonetheless, the value of new gross written premium collected by insurance brokers decreased from CAD5.01 billion (US$4.69 billion) in 2007 to CAD4.77 billion (US$4.53 billion) in 2011.

Direct marketing, which is essentially a business-to-business-to-client (B2B2C) model, was the third-largest distribution channel employed by insurers during the 2007-2011 period. The importance of this channel is closely linked to the cost-control measures adopted by insurers in order to reduce their commission expenses.

As opposed to Europe, where bancassurance is a well-developed distribution channel, Canada has a strict demarcation between banks and life insurers. This concerns also banks owning life assurers restricting them from using their client database to cross-sell insurance. The bancassurance channel’s share in total premium earnings has stood at only 1.1% in 2011.

Canadian life insurers’ focus has shifted towards reaching profitability targets, improving shareholder value and meeting the challenges of globalisation. The heavy emphasis on profits has caused them to a re-evaluate every aspect of business, including distribution strategies. Insurers are increasingly using non-traditional channels, such as e-commerce or social networks, and adopting more effective approaches to the use of technology which could offer a significant competitive advantage in the coming years.