Canadian Insurers Riding Out Low RatesBy Andrew Rickard | September 16 2015 01:04PM
Despite slow economic growth and low interest rates, A.M. Best is maintaining a stable rating outlook on Canadian life insurers.
In a special report published on Sept. 14, A.M. Best says that Canadian life insurers have responded well to ongoing economic uncertainty. The credit rating agency notes that performance in the industry has been favourable for the most part, and that profits have grown despite persistently low interest rates and regulatory changes.
How have Canadian life company executives weathered the storm? One tactic has been to lower equity market and interest-rate sensitivity in their insurance products. They have also increased the amount of assets under management through retirement product sales.
"In addition to the focus on preserving capital in recent years, companies are strategically targeting areas for growth. Life insurers have looked to improve client engagement through the use of technology and a customer-centric focus," reads the report. "Product pricing, while competitive, remains rational, with pricing actions evident in interest-sensitive and certain life insurance lines of business."
A.M. Best points out that the long-term nature of life insurers' liabilities poses particular difficulties, in that the interest rates that were in effect when their products were first sold may differ substantially from the current and future rates. The report suggests that some companies may face reinvestment risk as higher-yield bonds mature and they are forced to buy the lower-yielding bonds currently available in the market. It warns that insurers could also face difficulties should interest rates head sharply higher, since this would leave them vulnerable to disintermediation risk.
"For now, low rates are expected to continue to be the problem as they remain below historical rates," concludes the paper. "A.M. Best has seen insurers use hedging programs to mitigate the impact of interest rate and equity market movements. This strategy has helped to alleviate some volatility in earnings and capital. However, losses from derivatives can occur during favorable markets, as noted in 2013."