Canadian insurers feeling harsh effects of low rates

“The interest rate sensitivity of the Canadian life sector has increased over the past decade,” the report noted. “Despite poor post-crisis performance, direct annuity premiums have grown at a compound annual growth rate of 5.6 percent since 2003, faster than the 4.2 percent economic growth in nominal terms over the same period.”

Other findings in the report include:

• The interest rate vulnerability of life insurers’ portfolios depends on the product mix, which has become more interest rate-sensitive over the past decade.
• Life insurers are especially influenced by low interest rates because they have a higher share of long-term contracts that require increased reserves due to low asset-derived discount rates.
• The best case interest rate scenario for insurers would be a gradual return to “normal,” which is the likely scenario over the next two to three years; though the report stresses that insurers must plan for a range of interest rate scenarios.
• Policies could be made more flexible through adjustable pricing that reflects market developments. As such, product re-design offers insurers the most options to manage interest rate sensitivity going forward.

In terms of the future, Swiss Re Economic Research & Consulting sees interest rates in Canada rising slowly over the next two to three years, with the yield on the 1-year Canadian government bond forecasted to reach 4.5 percent in 2017.