The outlook for the Canadian life insurance industry is stable, but downside risks persist, says Moody’s Investors Service in a new report.
The rating agency says it expects economic fundamentals to modestly improve, which, in conjunction with the inherently stable structural aspects of the Canadian life insurance industry, favourable demographics, and recent efforts to hedge market exposures and realign product offerings, “support a stable outlook for the Canadian life insurance industry.”
The fact that the Canadian industry is concentrated in the hands of three major firms means that products such as segregated funds and universal life have more conservative (less beneficial to policyholders) features compared to those in the U.S. market, it says. “Consequently, the degree of equity market and interest rate sensitivity arising from these products is materially lower than is the case in the U.S. market,” the report notes.
That said, both the low rate environment and the market outlook remain concerns for the Canadian industry. Moody’s notes that if the current low interest rate environment persists beyond 2014, this would result in further mark-to-market charges, which would represent a concern for Canadian life insurers’ profitability.
“We expect interest rates in Canada to rise gradually beginning in 2013, giving Canadian life insurers relief from spread compression and earnings pressure from interest-sensitive businesses over time. Nonetheless, a downside scenario of a protracted period of low interest rates triggered by the euro area debt crisis or macro-economic deterioration remains possible,” Moody’s says, and this could result in further sub-par earnings performance.
Additionally, sensitivity to equity markets remain an important concern, it adds.