Overall, the year 2008 was clearly challenging for the Canadian insurance industry, but insurers also showed strength and weathered the market crisis better than their counterparts elsewhere in the world, said Frank Swedlove, President of the Canadian Life and Health Insurance Association (CLHIA) in an exclusive interview with The Insurance Journal.
"Obviously it was a very challenging year. There's no question about it. Various firms were affected in different ways, depending on the products they were selling and the exposures that they had, particularly to the stock market."
In general, companies selling segregated funds and guaranteed minimum withdrawal benefit (GMWB) products felt the equity market pain, whereas companies with broad group coverage or a great deal of health coverage may not have been affected very much, he observed.
"So the results are mixed, but it's clear that relative to any time in recent memory...that the industry has had probably it's most challenging year."
That said, Mr. Swedlove adds that compared to other countries, he believes the Canadian industry has fared well with substantially lower writedowns than in other markets. Total estimated writedowns and credit losses for the Canadian industry were under $3 billion up to December 2008, he says.
While certainly not insignificant, many individual insurers in other countries experienced extremely large write-offs. "I have a list of 10 (foreign) companies whose write-offs were all greater than all the Canadian write-offs put together. Everyone knows about AIG, but other companies in the United States and Europe have had extremely large write-offs," some in the $4 billion range or more.
Another very important distinction for the Canadian industry vis-a-vis the rest of the world is that, "We've been able to maintain our capital levels without any kind of government assistance."
On May 22, the federal government did announce the Canadian Life Insurers Assurance Facility (CLIAF), which will provide insurance on the wholesale term borrowing of federally regulated life insurance companies. The program is aimed at helping Canada's life insurance industry access wholesale debt markets.
Mr. Swedlove says this facility allows for some guarantees with respect to borrowing by insurance companies, but it is not a government bailout as seen in other countries. Borrowing would be done "essentially at commercial rates and I am not aware at this point of any insurance company using this facility," he said during the interview in early June.
The Canadian industry's reputation has remained solid throughout the crisis and even proven itself a role model, he adds.
"Canada is recognized as having a solid regulatory environment for insurance so consequently we've had a good reputation. People show a lot of confidence in [Canadian] insurance companies."
He says this confidence has been demonstrated by the fact that a number of companies have gone to market in recent months to raise capital and have been quite successful. "Canadian companies are continuing to be able to raise money, continuing to be able to meet all their obligations to policyholders, so given all the challenges of the last six to nine months, overall I think the industry has come out reasonably well."
Canada as a role model
Because the Canadian industry has weathered the market crisis relatively well, Mr. Swedlove says other countries are looking to our regulation model. "We have been very active in talking to people about how regulation is done in Canada. We've had a lot of interest expressed by other countries, in particular the United States, about how we do things in Canada to learn and see if there are some models they can adopt."
In April, the CLHIA's U.S. counterpart, the American Council of Life Insurers, (ACLI) sent two representatives to Canada on a fact finding mission, he notes. One of those officials, Brad Smith, ACLI's Chief International Officer told the Globe & Mail that, "As financial services reform is considered here (in the U.S.), Canada provides a good model to examine." Mr. Smith added that, "Canada has had a very good experience with a strong, fluid and - really - what we would consider to be one of the pre-eminent models of solvency regulation globally."
Mr. Swedlove says that from his standpoint, "There is clearly increasing interest in how we do things here. We, as an industry, are very supportive of principles and risk-based regulation. We think that Canada is the world leader in that and it has shown to be a very effective way to regulate opposed to rules-based regulation through this crisis."
Has the market crisis shown that some insurers have taken on too much risk, especially with respect to equity exposure? Mr. Swedlove says he wouldn't say so, because the companies have been able to continue to meet their capital requirements.
He adds that the Minimum Continuing Capital and Surplus Requirements (MCCSR), the regulatory measurement of the capital strength of a company was at 229% at the end of 2008 - the strongest it has ever been for the industry overall. The Federal regulator, the Office of the Superintendent of Financial Institutions' (OSFI), has a target ratio of 150% for the MCCSR of a life insurance company. "So, our companies continue to be well capitalized and continue to be strong entities," says Mr. Swedlove.
At the same time, he says it's no secret that some of the new products, particularly GMWB products where there's an exposure to the stock market led to having to reserve against potential future losses, "but that reflects the growth and development of the industry and the attempt of the industry to respond to the needs of consumers."
Asked about whether he believes insurers are likely to continue to take measures to reduce risk in their segregated fund and GMWB products, such as Sun Life Financial's recent announcement about changes to its line-up (see page 3), Mr. Swedlove commented that as with any new and innovative product like GMWBs, insurers are learning from experience. "In the last several months they've seen what can occur in the marketplace, the implications for the company and they are adjusting accordingly in terms of the structure of the products.
"Everyone learns from challenging times," he adds. "Nobody was predicting massive drops in the market like we've seen over the last little...There is knowledge that has been gained and we'll apply that to future product offerings and pricing. So sure, there have been lessons learned.
Mr. Swedlove adds that it must be remembered that individual companies have been dealing with very different circumstances. "For a lot of companies it will be business as usual. For others it will be a very serious reflection on what they offer and how it's priced."
Has consumer confidence toward the insurance industry been impacted by the crisis? Mr. Swedlove thinks that last fall, around the time that AIG's troubles came to light, there was increased consumer concern since AIG had a subsidiary in Canada. "That led to an increase in calls...but overall we're not seeing any major increase in calls at this point. I think Canadians have gotten the message that the life insurance sector remains strong and are not expressing a lot of concern to companies or to ourselves."
Going forward, Mr. Swedlove says he is positive about the prospects of Canadian life insurers for a few reasons. The first is that Canada has a very strong regulatory environment and that is recognized internationally. "So I think Canadian companies can feel confident that they are looked at positively around the world and I think that will be good for business internationally."
The second reason is that Canadian insurers have maintained a strong capital base. "As we come out of this recession, companies with a strong capital base will be in a position to take advantage of opportunities," he says.
His third reason behind his positive outlook is that because of the economic crisis Canadians are now more aware of the need for financial security.