10 billion reasons why the insurance industry’s advice on pension reform should be ignored

Jonathan Chevreau of the Financial Post writes today about the “10 billion reasons why Manulife and insurance companies like the status quo” in terms of Canada’s retirement system, 10 billion being the amount of variable rate annuity product, Income Plus, that Manulife has been successful in selling and which was launched simultaneously at the time of the income trust market’s demise, as lobbied for by the very life insurance industry who would benefit (funny that?).

I would argue that Canadians have 10 billion reasons why Manulife and the insurance industry lobby group’s advice should be derided and scorned rather than heeded. The insurance industry lobby group would have us believe that all is well with the ongoing proliferation of this kind of synthetic, derivative based form of retirement savings product, like Income Plus. The President of the insurance industry lobby group writes “"Canada's life insurers already offer guaranteed income products that allow individuals to securely shift from asset accumulation into the retirement payout phase.", as if to infer that is a good thing.

What is good about a product issued by life insurance company’s that is not even being properly hedged? Unless we are masochists by nature, why in the world would Canadian policies favour the issuance of more product, namely guaranteed income products, that experst in the indsurty like Warren Buffett consider to be “crazy” in terms of the risks that these products entail for both the insurance companies and those who buy them? ( see http://ifawebnews.com/2009/05/07/buffett-says-life-insurers-took-%E2%80%98crazy%E2%80%99-risks-on-variable-annuities/)

Meanwhile we have a perfect example here in Canada about the risks that were foretold by Warren Buffett, which almost led to the collapse of insurance giant Manulife via these very products and their inherent risks. Why would we take advice from Manulife or the insurance indsutry lobby group on the question of pension security, in the face of this kind of reckless and wanton fallout?

Manulife served with OSC notice

CFO retirement 'unrelated'

John Greenwood And Barbara Shecter,
Financial Post
Saturday, June 20, 2009

Manulife Financial Corp. has received an enforcement notice from the Ontario Securities Commission related to its disclosure of risks associated with its variable annuity guarantees and segregated fund products.

The notice, which arrived this week, indicates a "preliminary conclusion" by OSC staff that Manulife failed to properly disclose before March the potential impact its investment product guarantees would have in the event that equity markets declined, the company said in a statement released after markets closed yesterday.

Meanwhile, Manulife announced the departure of Peter Rubenovitch, its long-time chief financial officer and right-hand man of former chief executive Dominic D'Alessandro. The company said the two issues were unrelated.

As a result of guarantees on its investment products , Manulife took losses that were so significant its capital levels were affected.

Manulife shares have declined 43% from their peak in December 2007.

Manulife, which believes it satisfied disclosure requirements related to its investment products, said it has the opportunity to respond to the notice before OSC staff come to a decision on whether to commence proceedings.

Toronto-based Manulife enjoyed a spectacular rise during much of the current decade but got into trouble in the financial crisis when it had to make good on guarantees it made on investment products.

Bay Street began asking questions about Manulife's risk-taking and failure to hedge its variable annuity products late last year, just after the giant insurer had to obtain a $3-billion, five-year loan from the major Canadian banks to bolster its capital reserves.

In a conference call to discuss Manulife's financial results, a senior analyst asked, "Why didn't you start to hedge once you went through your tolerance level at 15%?"

According to the Insurance Journal, Mr. D'Allesandro responded: "We didn't expect the volatility in the markets that actually transpired.... We clearly did not appreciate that markets would fall quite as sharply as they did, and expose us to the level of potential risk that they have."