OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has released a new briefing offering its view on how lower interest rates could pressure the Canadian life industry’s earnings in 2015 and create further spread compression. The Bank of Canada announced in January 2015 a cut in its overnight rates to 0.75% from 1%. The surprise move was done to counteract the negative economic impact of lower oil prices on Canada, a reduced GDP growth forecast and fears of a housing bubble.
The Best’s Briefing, titled, “Interest Rates Heading the Wrong Way for Canadian Life Insurers,” states that A.M. Best has observed Canadian life insurance companies de-risk their product portfolios over the past few years and focus on less capital-intensive products while reducing their exposure to interest-sensitive and equity-linked insurance businesses. While this has helped reduce volatility of earnings and boost capital, the expectation for many had been an eventual interest-rate increase during 2015.
Canadian IFRS reporting for life insurers is tied closely to interest rate movements through mark-to-market accounting and actuarial requirements. A decrease in interest rates would impact a company’s Initial Reinvestment Rates (IRR), as it is expected that new money would be invested at lower rates.
Additionally, the asset side of the balance sheet may continue to see pressure. Fending off declining investment returns could become a challenge without taking undue risk, while asset/liability duration matching becomes harder to manage. The decline in rates and sluggish economic growth in Canada also could trigger slower sales for the life insurance industry. Low interest rates have led many insurers to adjust pricing to preserve profit margins, and further price hikes may make certain products uncompetitive for strapped consumers, especially in areas hard hit by the sharp decrease in oil prices.
However, while A.M. Best expects profitability to be impacted negatively, the company believes capitalization for the industry should remain more than adequate after the buildup of capital over the past few years.
To access the full, complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=233369.
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