Low interest rates represent an ongoing struggle for lifecos

“It has been a very painful experience, obviously, in the last several years — there have been some very significant increases in reserves,” he said. “My sense is that we are going to see a continuation of low interest rates.”

However, insurance companies have done a good job of managing the low interest rate environment in recent years by redesigning their products to reduce their exposure to risk and through greater use of hedging, Henderson said.

With respect to the in-force policies that insurance companies sold years ago, there is little they can do to mitigate the impact of unfavourable economic conditions. The longer that interest rates remain low, Henderson said, the more insurers’ margins will be squeezed.

“One of the issues is that the in-force blocks are probably underpriced compared with where they were initially,” he said. “Interest rates were assumed to be higher when products were sold, and now interest rates have declined, so there’s an issue there.”

In addition to economic challenges, Henderson acknowledged that the industry faces difficulties in complying with the evolving regulatory environment. In particular, he said smaller companies have a hard time managing their compliance responsibilities.

“Smaller companies have a tougher time with the regulatory burden than the larger companies,” he said. “They struggle to manage those costs.”

OSFI applies a principles-based approach to regulation in order to provide companies with flexibility in the way they apply and comply with the rules, Henderson said.

“We’re one of the few organizations that uses that [approach],” he said. “Principles-based [regulations] have the advantage of allowing a lot of flexibility. They allow us to consider the institution’s size, its complexity in determining what the requirements are.”

Although some companies appreciate that flexibility, Henderson said others struggle with ensuring they are compliant with a principles-based regulatory regime.

“[Principles-based rules] are more difficult to interpret,” he said. “So, we actually get a very mixed message on that. We have some companies that complain that principles-based is too difficult to manage, and others would prefer that we were prescriptive.”

In addition to these challenges, life insurers face the difficult task of keeping up with various other competitive pressures and changes in consumer expectations, Henderson said. For example, he pointed to the evolution of distribution models with more online sales channels emerging as Canadians become accustomed to accessing products and services via the Internet. Nonetheless, he said advisors will continue to play an important role in providing Canadians with insurance coverage.

“Distribution is changing, and it will continue to change,” Henderson said. “But I don’t think face-to-face will ever disappear. I think there’s a need for that.”

Henderson also said he expects product offerings to shift as consumer needs change and evolve. Although there has been a heavy focus on wealth accumulation products catered to the baby boomer generation in recent years, he said the insurance industry might shift its focus back toward traditional insurance products in the years ahead.

As the insurance industry grapples these changes, Henderson said it’s vital for insurance companies to prepare themselves for new risks.

“We want companies to think ahead, and try to figure out what emerging risks they might be facing,” he said, “and how they can deal with them.”