During a panel discussion at the recent Insurance and Investments Convention in Montreal, three top insurance industry executives all agreed on one point: the highly regulated Canadian insurance industry is dealing better with the market crisis than financial sectors in other parts of the world.
In response to a question about the impact of the market crisis, Jean-François Blais, president and CEO of AXA Canada, said during a financial crisis the market quickly becomes illiquid. So, the first priority of financial institutions is to review their assets and evaluate their own liquidities.Canadian companies, which are subject to strict regulations, have done very well in this regard, he said. "One thing that everyone learned is that Canadian regulation held up best during the crisis of anywhere in the world. He added, "I am proud to say that…Canadian institutions were capable of meeting their own needs, that they were prudent and conservative in their management…Most companies have very strong solvability ratios. Mr. Blais noted that AXA Canada, for example, has the same solvability ratio now as it did before the market crisis.
His company stayed away from asset backed commercial paper entirely because it had only received one recommendation from a credit rating agency, which raised a red flag. AXA Canada’s policy is to have at least two recommendations per asset.
Nick Pszeniczny, executive vice-president of Great-West Life, Canada Life and London Life said his company’s third-quarter results show $2.3 billion in earnings year-to-date, "which is of course quite significant in today’s marketplace." The company’s minimum continuing capital and surplus requirements (MCCSR) is over 200%, so the company is well capitalized and it "has only written down $100 million," he said. So, "Overall, the implications of the crisis has had somewhat of a minimal effect" on the organization, Mr. Pszeniczny explained. These results are the by-product of a prudent investing strategy, he says. However, with the TSX continuing to underperform, there are implications for the overall assets, so his company is continuing to follow their prudent strategies.
With respect to the industry in general, Mr. Pszeniczny, agreed that Canada is looking good compared to other parts of the world where a number of financial institutions are receiving government bailouts. "The Canadian life and health industry remains very strong in spite of the economic uncertainty we are all facing now."
Pierre-Yves Julien, president and CEO of Medavie Blue Cross and chairman of the Canadian Life and Health Industry Association (CLHIA) said the crisis has had very little short term impact on his company since the majority of its assets are very conservatively invested. However, he says the risk going forward is that Canadian employers will have liquidity problems and that could effect his company’s business. "We hope that the liquidity crisis won’t transform into an economic crisis."Speaking on behalf of the CLHIA, Mr. Julien said due to regulatory requirements, Canadian insurers’ level of capitalization is very good. This has positioned them very well in the international market.
Risk and return
The market crisis should lead the global financial industry to re-evaluate its approach to risk management, said Mr. Blais. He added that internationally, financial industry firms relaxed their standards toward risk. "Large Wall Street firms have disappeared that never showed a quarterly loss…" Going forward, he added, not only will firms have to consider risk versus return, they must also consider risk versus liquidity. "For me, this is a new reality."
Asked a question about whether they thought bancassurance would be coming to Canada in the future, Mr. Julien said the success of Canada’s current financial services model during the current market crisis probably makes this unlikely. "The events of 2008 could strengthen the separation of financial institutions…"
Asked whether he believes the current market crisis will result in more regulation of the Canadian insurance industry, Mr. Julien said he does not think so because the current system has responded well to the crisis. Mr. Blais replied, "There needs to be more regulation of derivative products, not insurance. It is already well regulated."
Asked whether they thought insurers would be able to meet their obligations related to segregated fund guarantees, Mr. Blais said he is happy to see that ratings agencies are asking a lot of questions about what mechanisms are being used to guarantee the guarantees. Some insurers may be less capable of delivering on these guarantees without hedging programs, but this would have to be looked at on an insurer-by-insurer basis, he added.
Mr. Pszeniczny says his organization’s level of seg fund guarantees is roughly 75-75 and that through their reserves it has tremendous capacity to meet these guarantees. However, he did raise the issue of the new guaranteed minimum withdrawal benefit products (GMWB). "I think candidly as we continue to see GMWB products introduced to the marketplace, that it will take much more calculated pricing on behalf of the insurance companies." He says product pricing, commission scales and ensuring the appropriate reserves are made to offset the risks and guarantees offered by these products is necessary. "I think that will be a reality going forward."
Challenges for advisors
Asked about the impact of the crisis on advisors, Mr. Pszeniczny said compliance is a very important issue. Sound business practices including excellent record keeping and documentation management are crucial, especially in the current difficult market. Difficult times could provoke "interesting behaviour" from clients, he warned. Some who have lost money could sue their advisors. To defend themselves, accurate record keeping is a must.
Another great area of concern for advisors is succession planning, said Mr. Pszeniczny. Seventy percent of Canadian financial advisors are approaching retirement, he noted. Recruitment is therefore an important issue for advisors. "They should be thinking of succession."
He suggested that all advisors should consider inviting someone into their practice as a protégé "to sustain continuity…We all have to take ownership for new blood."
Lastly, Mr. Pszeniczny addressed a question about the new Do Not Call List. "We better find a way to work on a referred basis," he said, adding that this new rule will be especially difficult for young advisors starting out in the business.