Insurance Policy Protection Risk Security Concepts

Rising inflation and interest rates could help improve profits for Canada’s life insurers, suggest experts from rating agency A.M. Best Company Inc.

“A modest amount of inflation is actually very good for insurance. Higher interest rates could improve yield on their investments, which could lead to improved profitability,” said Michael Adams, associate director with Oldwick, N.J.-based A.M. Best. “[Life insurers] could potentially pass those benefits on to the policyholders or they could retain the profitability.”

However, Adams said that December’s inflation reading of 4.8% is high, particularly when it is an annualized number. Statistics Canada releases the inflation rate for January on Wednesday.

“A spike in inflation and interest rates would have negative ramifications, the most notable being a substantial decline in the market value of insurers’ fixed income investments,” Adams added. “While interest rates have been starting to rise in recent months, we are not at a point yet where it would have negative ramifications for life insurers.”

Anthony McSwieney, senior financial analyst with A.M. Best, agrees. “Inflation itself would not have an immediate impact on insurance pricing,” he said. “The impact is really more policyholder behaviour – will their pocketbooks be stretched so much that [they] can’t afford insurance? Or would it be the fact that they’re more focused on insurance? We don’t know.”

Adams and McSwieney were interviewed before Canada’s three biggest life insurers released their 2021 financial results on Feb. 9. Manulife Financial Corp. and Great-West Lifeco Inc. both brought in higher net premiums year over year, while Sun Life Financial Inc.’s dropped slightly.

In A.M. Best’s 2021 annual Canadian market report, which releases each September, A.M. Best said all of Canada’s life insurance companies have financial strength ratings of A- (excellent) or higher. This means A.M. Best analysts believe those carriers have an “excellent ability” to meet their ongoing insurance obligations.

That report also saw A.M. Best revise its outlook for Canada’s life/annuity insurance industry to “stable” from “negative.” (A “stable” outlook means A.M. Best expects market trends to have a “neutral” influence on companies. The outlook applies to the industry overall, and not necessarily to individual carriers.)

A.M. Best had downgraded its outlook to negative when the Covid-19 pandemic started due to the economic uncertainty, Adams said.

“Prior to [Covid-19, the outlook] had been stable pretty much as long as I can remember in recent history,” Adams explained. “As the pandemic went on, at least in the Canadian market, mortality was not quite as bad as many had feared when the pandemic first hit. Also, their credit losses and companies’ investment portfolios weren’t impacted quite as much as originally thought.”

“If you look at the Canadian [life insurance] industry, capitalization was still strong throughout the pandemic,” McSwieney said.

For example, the insurers’ life insurance capital adequacy tests (a measure used by the federal Office of the Superintendent of Financial Institutions) remained strong, McSwieney said: “There may have been a slight disruption in premium but not for all [Canadian life insurance] companies, particularly with life insurers with an international footprint.”

On Feb. 9, the three biggest lifecos reported their LICATs: Sun Life Financial’s was 145% as of Dec. 31, 2021, down slightly from 146% a year earlier; Great-West Lifeco’s dropped to 124% from 129% over the same period, and The Manufacturers Life Insurance Company’s dropped to 142% from 149%.

In essence, the regulator wants life insurers to keep their LICATs above 100%.