Low interest rates have restrained the profitability of Canadian insurers. Insurers are therefore offseting these rate-related losses by inflating the price of their protection.
Alongside Canada, the Chinese and US economies and developing countries will grow slower than formerly thought, while the European Union is most likely going to suffer a “brief” recession. The statistics can, however, easily be even less favourable.
Canada’s insurers do not like these developments. This is because insurers are contingent upon financial interest earned on portfolio investments to augment their income.
Revenues from life insurance premiums are traditionally used to purchase bonds that are relatively very safe, and are left there to produce interest. This interest can then go to cover any client claims, obligations, and other miscellaneous costs. Any income that is in fact not spent on these items becomes profits.
Rates are at their historical lows and they have put the screws to profitability for of insurance companies. Many insurers are offsetting these rates by raising the premiums on their permanent life insurance plans. All major insurance providers have added to the fees on their fixed-premium universal life policies. Manulife has gone so far as to eliminate this type of coverage from its whole life and universal life portfolio. Worse yet, other large insurers are likely to do the same in the coming months.
The situation not likely to improve, seeing as central banks in Canada and the United States are saying that interest rates will remain low for the foreseeable future.
The bright side is that this situation has prompted a few minor Canadian insurers to try and leave the rates on their universal life and whole life deals intact.
More on the adverse effect of the current long-lasting interest rate trough on pensions and government employees here.
Brought to you by Lorne S. Marr, an independent insurance broker and an expert on Canadian life insurance. Lorne works with more than twelve Canadian insurance companies.