If capital reserves are a challenge for companies, relief could be in sight, as the Canadian Institute of Actuaries and the Actuarial Standards Board work to draft new reserving standards, due to be released in June. It is proposed the new standards would be implemented, starting in October.Tom MacKinnon, managing director at BMO Capital Markets writes that current reserving standards “are generally too onerous in today’s low interest rate environment.” The revisions are expected to incorporate scenarios that reflect a much longer history. “We believe the new proposed standards will be less onerous generally, and could result in a one-time reserve release and earnings per share (EPS) gain.” This gain though, could be offset by tighter actuarial standards.
Eliminating a large portion of insurance carrier’s interest rate sensitivity (proposed standards do not change the sensitivity to equity market fluctuations) is potentially positive for insurers in general, he writes, but could be negative as well, since shares are trading today under the assumption that EPS will be given a boost as rates climb.
If drafted and implemented as expected, the change could create an interesting, and somewhat dramatic shift, where markets focus on core EPS earnings growth for the companies affected, as opposed to the current situation, where the stocks rise and fall in response to interest rate movements.