Coronavirus and low interest rates present challenges to Canadian life insurers

The big four Canadian life insurance companies continue to benefit from new business growth across their diverse businesses bolstered by strong capitalization levels. But a report released March 11 by DBRS Morningstar cautions that the coronavirus, economic/market uncertainties and ongoing low interest rates are among the challenges now presenting themselves to insurers.

In its report entitled Large Canadian Life Insurers: Strong Performance in 2019, but Coronavirus Weighs on 2020 Outlook, DBRS Morningstar says it expects meaningful contributions in premium growth in Asia and the United States where Manulife Financial (MFC) and Sun Life Financial (SLF) are strong. An expanding global economy over the past five years has helped boost growth in Ireland, the UK and Germany where Great-West Life (GWO) is strong, but sales will likely be muted this year based on slower economic growth prospects.

Issues could cause problems for insurers

But there are other issues that could affect the insurers’ bottom lines, including the coronavirus and low interest rates.

The coronavirus could slow new business momentum and overall profitability for MFC and SLF in their Asia business segments. They will likely see a modest increase in mortality claims and their health segment claims, but these should be manageable given their strong financial positions, says the report.

While claim costs to date are “negligible,” business disruptions in Asia, including quarantine measures in effect in multiple countries, will likely affect insurance sales.  But “the geographically diversified operations of the global players should serve to mitigate the currently elevated risk in Asian operations. Moreover, these insurers also have reinsurance treaties to help mitigate the impact of mortality/morbidity losses related to a pandemic event.”

Coronavirus could affect Great-West strongholds

Great-West Life (GWO) has negligible exposure to Asia and operates in European countries that are not yet considered risky coronavirus zones. However, there remains the chance that the current situation in Italy may be replicated in the UK, Ireland, or Germany, where the company does have sizable operations.

Canadian life insurers have taken steps to lessen major disruptions, providing some protection against a recessionary environment triggered by the coronavirus outbreak, states the report.

It also says all regulated insurers regularly perform stress-testing activities to assumed mortality rates, including—if applicable—an absolute increase in mortality rates resulting from an epidemic or similarly catastrophic scenario.

Insurers remain strong

Also on the radar are the recent steps taken by the U.S. Fed and the Bank of Canada to reduce interest rates in an effort to ease potential economic disruptions from the coronavirus. DBRS Morningstar expects these actions to put the lid on overall profitability in 2020. It notes that insurers have been operating in a persistently low interest-rate environment for the past decade. But “capitalization buffers above the minimum supervisory levels remain robust at the end of 2019 and will serve to absorb these shocks,” says the rating agency.

MFC, SLF, GWO and ia Financial Corp. are maintaining strong capitalization levels and are all keeping financial leverage below 30%, positioning them well to navigate a stressed market environment.

“We consider that these insurers are relatively well positioned to cope with the challenges they face, supported by their diverse businesses and solid earnings ability,” says the DBRS Morningstar report.