Policies from late '90s could cost two life-insurance giants dearly

The firms face massive potential liabilities because of a generous side benefit

Policies from late '90s could cost two life-insurance giants dearly

Loopholes in life-insurance policies issued nearly 20 years ago could have dire consequences for Industrial Alliance Insurance and Financial Services and Manulife Financial, currently embroiled in a legal battle in a Saskatoon court.                    

The policies in question were issued in the late ‘90s during a time of higher interest rate by firms later acquired by iA and Manulife. The plans allowed holders to invest in side accounts with guaranteed rates of up to five per cent in Industrial Alliance’s case, and up to four per cent for Manulife, reported the Financial Post. The universal life policies in question were written in 1997 by Aetna Life Insurance (later acquired by Maritime Life Assurance, then Manulife in 2004) and in 1999 by National Life Assurance of Canada (acquired by Industrial Alliance in 2005).

According to affidavits from company representatives, the side accounts were meant to solve a particular customer annoyance. Universal life policies can provide holders with investment income on a tax-exempt basis, but only up to a certain value imposed by the Canada Revenue Agency (CRA). As policy values got tied to equity markets and became more volatile, insurers sometimes had to return funds to customers to stay within limits, only to ask for the annual premium payment shortly afterward.

“[T]he side account acted as a receptacle for the insurer to deposit excess funds beyond the CRA limit and for policyholders to prepay future premiums,” the Post explained.

In 2007, Michael Hawkins, an officer of the general partner of Ituna Investment LP and Mosten Investment LP, started looking for policies that offered attractive guaranteed interest rates, no provisions for rate reductions, and no caps on the permissible investment size; in 2009 and 2010, he and his partners found such policies and purchased them in Saskatchewan, where the purchase of insurance policies from their original holders is allowed.

Over three years, they put a net total of more than $4 million into the more lucrative IA policy; IA slammed the brakes on them in early 2016 following an internal audit of the policy. They managed to invest only $10,000 into the Manulife policy’s side account in 2015 before the firm returned their funds in 2016.

Ituna and Mosten filed court applications in December to compel the insurers to accept their investments. In response, company executives cited contract language referring to balances as “premiums on deposit,” arguing any amount that isn’t reasonably required for future premium payments should be excluded from the side accounts.

But Ituna countered out that IA had previously sent it a schedule illustrating a $1-million investment in the side account. IA also admitted that it had no procedures to guard against deposit-taking or million-dollar investments; its first response to Ituna’s $4-million side-account investment was to put additional deposits into a short-term, lower-rate option.

Testifying for the defense, independent actuary Oliver Wyman said allowing unlimited amounts earning five per cent would, in a worst-case scenario, result in unlimited liabilities, an inability to attract capital, and a cessation of operations for the insurers.

Related stories: