While there are definite headwinds ahead for Canada’s life insurers, they are faring better than many of their international counterparts, say analysts from U.S.-based credit-rating agency A.M. Best.
Canadian life insurers are better capitalized and more conservative than their counterparts in the U.S., after diversifying outside the country and expanding in the asset management area, Ed Kohlberg, associate director of A.M. Best, said in early September while releasing the company’s latest report on the industry.
But low interest rates, regulatory issues and changes in the value of the loonie are putting some pressure on Canadian life insurers, said Kohlberg.
“Companies are maintaining their margins and their margin targets, but if interest rates continue to stay low over the long term, will those margins get impacted?” asked Kohlberg. “Companies have pulled some levers over the past few years to maintain those margins, but will those levers be available going forward?”
Kohlberg’s presentation took place minutes before the Bank of Canada raised its benchmark interest rate by one-quarter point to 1.0 per cent, its second 25-basis-point increase since July – a hike Kohlberg said experts predicted had only a 26 per cent chance of taking place. The bank increase followed a recent report from Statistics Canada indicating the economy increased by 4.5 per cent in the second quarter. The rate hike also saw the Canadian dollar rise that day to an average trading price of US81.54 cents.
While low interest rates do have an impact on the insurance industry, “from a rating agency perspective, it’s important, but it’s not everything,” said Anthony McSwieney, senior financial analyst with A.M. Best’s life division.
The rating outlook for the Canadian life insurance remains stable, compared with the negative rating outlook for the U.S. life and annuity industry, which is negative, states A.M. Best’s report. In the U.S., the industry has been “driven by growing volatility on both economic and regulatory fronts, including continued interest rate pressures.” On the other hand, the Canadian industry has been strategic in holding down costs and repricing existing products, said the report.
While McSwieney said Canada is poised for a growth rate of about 3 per cent this year, two or three more interest rate hikes will not help savers and will create, from a credit rating perspective, volatility with respect to hedging and macro-hedging.
Growth outside of the country
One of the great benefits of the Canadian life and health insurance industry is its growth outside of the country, said Kohlberg. Companies like Manulife, Sun Life and Great-West Life have had operations in other countries for many years and are basically household names, making it difficult for new entrants to gain ground.
He cited Manulife’s U.S. division that bought New York Life’s retirement plan services business two year ago and is continuing its growth in Asia.
As well, last year, Sun Life Financial completed its purchase of the U.S. employee benefits business of Assurant Inc., making Sun Life U.S. the sixth-largest group benefits business in the U.S.
Also in 2016, Great-West Lifeco’s Irish subsidiary assumed control of GloHealth Financial Services Ltd., increasing its existing customer base in the Irish health insurance market.
Regulatory changes are always big in the life insurance industry, said Kohlberg. He mentioned the new capital requirements, known as Life Insurance Capital Adequacy Test or LICAT – that will replace the Minimum Continuing Capital and Surplus Requirements (MCCSR) beginning Jan. 1, 2018. He said the LICAT rules are not expected to increase the amount of capital required, but some lines of business might see heavier charges under the new model. This, he said, might make some insurers re-evaluate whether those lines of business make financial sense for them to continue.
The report notes that all of the Canadian life insurers have “excellent” or higher financial strength ratings and none have negative outlooks.