MTHEL131 Lecture 2 Sept. 18, 2013
Contract: binding agreement between two parties (Beneficiary is not part of the contract
because they have no rights and they can be changed at any time.)
Third party contracts: When the insured and the life insured are two different people (inured,
life insured, insurer)
Insured: person who takes out the policy (policy owner)
Life insured: person whose life will be compensated for
Life insurance contract is a unilateral contract, which means one party can back out of the
contract at any time (not the insurer, only the policy owner).
3 features of a life insurance policy:
1. Enforced for the whole of life (can never expire)
2. Level annual premiums for life
3. Premiums vary based on the age of entry
Precautions taken: (by the old equitable)
• In the case of some public epidemic or calamity, some substantial increases to the
amount payable may be made temporarily
• Ensure its reputation, keep its ability to keep its promise (most valuable asset)
• Reserve the right to raise premiums for a certain class of people (ex: all males between
30 and 35)
Life and Health Insurance Industry in Canada Today
Insurance products include a wide range of financial products such as:
• Life insurance
• Disability insurance
• Health (ie. Dental, prescription medication, long-term care, critical illness, etc.)
• Investment products (Mortgages, RESPs, annuities, segregated funds, etc.)
• Living benefit products (benefits where the life insured can be reimbursed without dying)
57% of the Canadian market is controlled by 3 firms
1. Great-West Group (Great West Life, Canada Life, London Life)
2. Manulife Financial
3. Sunlife Financial
CLHIA (Canadian life and health insurance association) did a study in 1997 of Canadians who
died that year:
• What does the average policy holder (life insured) look like? (What characteristics?)
o 70% were male
o 70% were over 65
o 88% were over 50
• Who were the beneficiaries?
o Wives MTHEL131 Lecture 2 Sept. 18, 2013
• How big were these policies?
o 83% of these policies were less than $25, 000
• How long had these policies been enforced?
o 72% had been enforced for more than 20 years
• What types of policies?
o 74% were permanent
Many other cases with insurers had policies for less than a year and high payouts
Ex: In 1997, 36 year old had $100, 000 policy who had a 9 month policy, paid $245 in
premium who died of heart attack. Many claims to young widowers of a few hundred
The Importance of Life Insurance:
The industry pays out over $ 1.1 billion every week
2. Improve the quality of life of Canadians
90% of this is paid to the living.
3. The life and health insurance plays an important role in meeting the financing
needs of all levels of government.
When a person makes an expensive purchase, they take out a loan. The federal government
borrows money from the insurance companies using bonds (like a promise), then sells the
bonds. Institutional investors are the ones that buy government bonds (Ex: pension funds,
banks, and life and health insurance companies)
• 20 years to maturity
• Insurance does a background check to minimise the risk
• Interest rate is 1.8% (relatively low, compare to Greece – 24%)
Life and health insurance companies make very safe investments: ie. Government of Canada
bonds. Nearly 20% of all industry assets held by Canadian insurance companies are
government of Canada bonds.
4. Financially strong industry
Other industry assets:
• Corporate bonds and stock – 40%
• Mutual funds – 20%
• Mortgages – 15%
• Other – 5%
These reserves are for the payment of future claims.
5. Internationally successful MTHEL131 Lecture 2 Sept. 18, 2013
One of the most secure capital industries in the country, Canadian insurance companies are
well known around the world. (Sunlife, Manulife) About 50% of insurance company’s revenue
come from international clients.
6. Highly competitive domestic industry
Over a hundred different companies in Canada, not many other industries centered in Canada
successful in Canada. The percentage of health insurance policies taken from Canadian
companies is 87% of the market s