Brokers: How will your carriers deal with low growth?

Canada’s solvency regulator sounds the warning that insurers may be up against a prolonged period of low interest rates, thus reducing the industry’s investment margins and encouraging a more accurate pricing of risks. How will your markets respond?

Canada’s insurance industry is in a good position to withstand a prolonged period of low interest rates, but already some within the insurance industry are talking about bucking the current trend of parking capital in dependable, low-yield investments.

Canada’s Superintendent of Financial Institutions, Julie Dickson, made the observation during a question-and-answer period with Neil Parkinson,  KPMG national insurance industry leader, at the KPMG 21st Annual Insurance Issues Conference in December 12, 2012.

Dickson said industry analysts appeared generally optimistic that the current low-interest rate environment may be short-lived, as the world recovers from the 2008-09 credit crisis. But she said recent analysis by more bearish investors suggests a prolonged period of low interest rates, with some projected a no-growth period lasting up to two decades.

That has some investors, such as insurance companies, experimenting with higher-yield investments, Dickson noted.

“I think the other thing about low growth, with interest rates being low, is the kinds of search for yield that we can begin to see, and I would say we're already starting to see that,” she said. “Globally, the corporate high-yield debt market is really active.

“People are telling me that they're seeing ‘covenant-light’ deals being done. I think in the insurance industry we have started to see more of a movement into NFI, non-financial investments, or alternative investments. And that really needs to be accompanied by a lot of risk management…

“We think that the closer to maturity the insurance obligations are, the more they should be matched with promise-to-pay assets like bonds, as opposed to assets without a promise to pay, like alternative investments.”

Dickson said that Canada already uses mark-to-market accounting principles, which, in effect, reflect true market value of an insurance company’s assets or liabilities. The approach has been criticized because it is more sensitive to volatility, but Dickson said Canadian companies “should be better prepared for this [volatility] than some other countries.”

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