Current macroeconomic conditions may adversely affect the life insurance industry. This outlook comes from Standard & Poor’s latest report, published in June 2008.
The report explains that the strong Canadian dollar is eating into income of companies that do business internationally. Good exchange risk hedging, however, shielded insurers from the negative effects of the dollar’s strength. To date, exchange transactions have not affected the credit ratings of the Canadian life insurance sector.
The credit crisis continues to erode the capital of many companies around the world, the report continues. The rating agency notes that Canadian life insurers’ weak exposure to asset backed commercial paper helped them skirt the financial woes caused by the collapse of the subprime sector in the United States.
The Canadian economy should narrowly avoid a recession, the report adds. High oil prices and the strength of the loonie have dampened competitiveness in sectors such as manufacturing. All the same, the global outlook remains stable thanks to vigorous energy and resources sectors, among other factors.
Like last year, Standard & Poor’s underlined that the Canadian life insurance market is highly concentrated. The three largest lifecos – Manulife Financial, Sun Life Financial and Great-West Life – control over 65% of the Canadian market. Foreign acquisitions should also continue, because the high flying loonie has greater purchasing power than other currencies.
The rating firm notes that fierce competition prevails despite the concentration of the Canadian market. Although only three companies dominate the life insurance sector, other players are exhibiting surprising resistance, the agency says. Sales at these insurers were buoyed by excellent customer service and an emphasis on developing innovative products.
Over the long term, the rating agency predicts that the Canadian life insurance sector will benefit from a slow but constant increase in interest rates. This will fuel an upsurge in retirement and wealth management products. In addition, due to the aging population, the growth of these products is expected to outpace that of traditional insurance products.
Wealth management trend
The report names several factors that should stoke the growth of wealth management. For one, strong stock market performance is spurring sales of segregated funds. The second factor is the advent of new products designed for the wave of baby boomers approaching retirement. The report gives the example of Manulife Financial: its guaranteed minimum withdrawal benefit product was an overnight success, and has been emulated by other companies.