As a way of encouraging growth throughout the international financial decline, universal overnight lending rate in Canada has remained at one per cent for 14 months with prospects of remaining at this level in the foreseeable time horizon.
At the same time, the United States, China and even emerging economies will grow at a slower rate than formerly thought, while the European Union is facing a likelihood of swinging into a “brief” recession, according to Bank of Canada experts. These economic can, however, easily be even less favourable.
All this is bad news for Canadian insurers in all areas. This is simply because they depend on financial interest from portfolio investments to support profits. The funds that insurers collect in the form of premiums are traditionally pooled and invested into bonds and similarly “safe" financial vehicles. Interest proceeds earned on these bonds in turn cover the costs of insurance claims, liabilities, and other miscellaneous outlays. Anything left over after these deductions becomes insurance company profits. And that is why it is so important for insurers to purchase quality bonds with higher interest rates. Under the current circumstances, however, bonds aremuch cheaper than they used to be due to the fact that their rate derives from the underlying overnight bank rate.
Many insurers are compensating for their interest income shortages by inflating the price of their permanent life insurance policies. All major insurance providers have bumped up the rates on their fixed universal life policies. Manulife Insurance has gone to the extreme and decided to cease including this type of insurance in its whole life and universal life portfolio. What’s more, additional large insurers may follow suit in the coming months.
The situation likely to continue judging by the fact that both Bank of Canada and the Fed are saying that they are going to maintain low interest rates for the foreseeable future.
On the bright side, several smaller players try to attract new customers by freezing the premiums on their whole life and universal life coverage plans.
Author, Lorne S. Marr, is an independent insurance broker and an expert on no medical life insurance . Lorne works with over twelve Canadian life insurance companies.