Tough global environment for insurers

“[Canadian] companies are certainly showing some strength,” says Frank Swedlove, president of the Canadian Life and Health Insurance Association Inc. “I think they’re starting to meet the challenges that they’re facing, particularly with respect to low long-term interest rates.”

Both life insurers and property and casualty (P&C) insurers are facing a similar variety of hurdles this year, largely related to the weak economic environment in most mature markets and low interest rates, according to Moody’s Global Life Insurance Outlook and Global P&C Insurance Outlook for 2013. But the outlook appears particularly grim for life insurers.

Says the Moody’s report: “Our 2013 global outlook for life insurers is negative, heavily influenced by our macroeconomic outlook and characterized by persistent low interest rates and slow economic growth.”

As life insurance purchases are discretionary for the most part, the Moody’s report explains, sales tend to decline during economic downturns: “Our outlook for global economic slowdown goes together with persistent high unemployment and weak consumer confidence in most advanced economies. This will continue to pressure revenue and, to a lower extent, net income of many life insurers over the next 18 months.”

In contrast, Moody’s global outlook for P&C insurers is stable. Although economic weakness typically limits growth in premium volumes and reduces investment-portfolio yields as a result of persistent low market interest rates, the Moody’s report says, the overall impact that this has on P&C companies usually is limited.

“P&C insurers are better positioned to withstand a slow-growth environment,” the report says, “as many P&C products remain mandatory for buyers, and certain P&C risks are uncorrelated with economic conditions.”

For life insurers, chronically low interest rates appear to be the greatest factor weighing on their profitability.

“The biggest challenge for the industry,” says Swedlove, “is continuing to provide the products that [it has] provided historically in a cost-effective way, in this kind of low long-term interest rate environment.”

Yet, he believes, insurance companies are coping well with this reality. Many insurers have amended their product offerings in order to soften the impact of low rates by raising prices, dialing back long-term guarantees and, in some cases, discontinuing certain products altogether.

“I think the industry is adjusting,” Swedlove says, “through some repricing and restructuring some of the products. I think [insurers have] responded very well to the challenges.”

Although these actions will improve the overall risk profile of the life insurance sector in the long term, the Moody’s report notes that these changes also reduce the attractiveness of some products, which could hamper sales in the near term: “Sales of many of these products – already down in 2012 – are likely to remain depressed globally in the coming [fiscal] quarters.”

Other challenges facing life insurers include the growing regulatory burden and capital requirements that have climbed considerably higher in recent years.

To cope with the ongoing challenges in the insurance sector, many life insurers are taking steps to diversify their sources of revenue by focusing more heavily on wealth management and retirement savings products.

With defined-benefit pension plans becoming increasingly scarce, and with Canadians seeking security as they approach retirement, this space holds huge opportunities for insurers, according to Swedlove.

“In this time of uncertainty for a lot of investors,” he says, “there really is a demand out there for security, and that’s what [insurers] provide to Canadians.”

Within the retirement savings landscape in Canada, insurers are particularly excited about the possibility that pooled registered pension plans (PRPPs) could be introduced in some provinces in 2013.

Assuming the necessary legislation is passed, says Swedlove, PRPPs could create a substantial new market for insurers: “That creates a real opportunity for more Canadians to have a pension plan. [Insurance] companies are keen to provide that product.”

Many insurers also are pursuing growth outside of Canada -particularly in emerging markets such as Asia, given the relatively stronger economic fundamentals in those markets.

“There are certainly expanding markets in Asia,” says Swedlove, “and in other parts of the world, which create opportunities for insurance companies.”

Toronto-based Sun Life Financial Inc., for instance, announced in January that it had teamed up with Malaysian state investor Khazanah Nasional Berhad to purchase 98% of a Malaysian life insurance company.

The Moody’s report says more acquisition activity is anticipated for 2013, especially in Asia and Latin America.

Although the long-term growth prospects in these markets are strong, this expansion activity is not entirely positive from a credit perspective, the Moody’s report notes, as merging markets generally are exposed to more risks than developed markets are.

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