In order to encourage growth throughout the universal financial downturn, overnight lending rate of Bank of Canada has stayed at one per cent since September 2010 and is most likely to linger at this figure in the foreseeable time horizon.
The United States, China and emerging economies will grow slower than previously thought. Unfortunately, the European Union is falling into a relatively mild decline. Nobody said, however, that the developments cannot in fact be less favourable.
All this is bad news for Canada’s insurers. Their income depend on interest incurred in financial investments.
Proceeds from life insurance premiums are usually put into bonds—a relatively very safe investment vehicle—and remain there to generate interest. This interest can cover the costs of insurance claims, overhead and other miscellaneous obligations. Interest revenue left over will become insurance company profits.
Unprecedentedly low rates have put the screws to profitability for of Canadian insurers. Many insurers are trying to balance out these rates by inflating the price of their permanent life insurance policies. Manulife, Empire Life, Industrial Alliance, Canada Life, and BMO Insurance have all bumped up the fees on their level-cost universal life plans. Manulife has taken even more drastic measures – they decided to remove this type of coverage from their permanent life offering altogether. What’s more, additional players are likely to do the same in the foreseeable future.
The outlooks are ugly, seeing as central banks in the US and Canada are saying that interest rates are going to remain low for the foreseeable future.
One positive outcome of this situation is that a few smaller Canadian insurers try to attract new customers by freezing their permanent plan rates.
Please read more on the effect of the current interest rate trough on government employees and pensions.
Lorne Marr, author, is an insurance specialist and an authority on no medical life insurance. Lorne works with over a dozen Canadian life insurers.