In a special report issued in September, A.M. Best explains that it is maintaining a stable outlook for the Canadian life and health insurance industry despite multiple pressures weighing on insurers such as low interest rates, volatile stock markets, global uncertainty and tough competition.
The ratings agency says that despite these difficult market conditions, the industry remains well capitalized and regulated in a conservative manner.
A.M. Best also notes that Canadian insurers are maintaining pricing discipline by increasing prices or withdrawing certain capital intensive products.
With regard to earnings volatility, business lines outside of the domestic market are mainly to blame. “However, life companies are evaluating all business lines, including those in Canada,” adds the ratings agency.
The report warns that there could be pressures to move the outlook to negative from stable “if greater earnings volatility persists, resulting in a reduction in the industry’s strong risk-adjusted capital position. For public companies, leverage has increased as stress in earnings has led to the need to fill capital holes with a combination of new debt and (mostly preferred) share offerings.”
A.M. Best observes that life companies are moving their product strategies away from market-linked to more fee-based product lines. “However, underperforming legacy blocks will continue to inhibit earnings growth, given the continued difficult economic conditions,” states the report.
The challenging market environment for insurers has been exacerbated by Canada’s accounting and capital regime, adds A.M. Best. Manulife Financial’s and Sun Life Financial’s volatile earnings have garnered the most media attention, but the whole industry has been impacted by the various market, accounting and reserve issues.
In particular, the report highlights Sun Life and Manulife’s significant retrenchment actions in the U.S. market. “Sun Life has placed its variable annuity and individual life business into run-off, while Manulife has reduced its variable annuity production by limiting sales to select distribution channels and raising premium rates significantly on its long-term care insurance block.”
The ratings agency also noted “a large scale retrenchment in the Canadian individual life market because many carriers have recognized appropriately the extreme pressure on capital of writing certain individual life products within the low interest-rate environment.”
As examples, the report points to Standard Life’s announcement in late 2011 to stop selling individual life products and RBC Insurance’s announcement in June 2012 to suspend sales of certain products due to the regulatory and economic environments.
Because of the maturity of the domestic market and the accounting and capital issues, A.M. Best says it expects Canada’s top insurers to increase their focus on the expansion of their international operations and sales of less capital-intensive products. As examples, the report mentions Sun Life’s U.S. employee benefits division, Sun Life and Manulife’s opportunities for growth in Asia, and Great-West Life’s continued expansion in Europe and the U.K. where it is a market share leader in group life and disability.
In Canada, insurers are increasingly looking at wealth management for growth. “Insurers have been more active in the mutual fund space in recent years because capital requirements for segregated funds have grown.”