Global insurance markets outlook for 2012

Canada life insurance outlook

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Canadian life insurers may need to improve their earnings prospects through such non-organic means as an opportunistic merger or acquisition, while building the case for future organic growth.

 

Uncertainty persists, but insurers can prosper

In the uncertain economic climate, life insurers in Canada confront a tricky balancing act in 2012 — managing both capital and risk in the highly competitive environment, while repositioning strategically for future growth. Sustained competition from both domestic and US life insurers continues to pressure the operating results and capital levels of many Canadian life insurers.

Additional challenges include a low interest rate environment and related concerns over the compression of spreads, unpredictable equity markets and their impact on hedging costs and reserves and investors in companies strongly emphasizing their need for higher returns. Complicating these issues is a regulatory regime that appears ever more rigorous.

In this environment, insurers must focus on earnings improvement, while simultaneously preserving their credit ratings and capital levels — not easy given the economic impediments to organic growth, such as persistently lower discretionary income in Canada intensifying the competition for what is now a smaller share of the market.

Consequently, Canadian life insurers may need to improve their earnings prospects through such non-organic means as an opportunistic merger or acquisition, while building the case for future organic growth. Canadian life insurers are increasingly risk averse, fostering changes in the design of life insurance product features.

Within the market, retirement account assets are still in recovery mode due to significant losses sustained in 2008, hindering ongoing development of the retirement income market. After a modest increase in 2010, variable annuity sales fell in the first half of 2011, and in the second half of the year were expected to remain flat, as economic conditions worsened.

On the bright side, both universal life and whole life products experienced an uptick in sales in 2011, compensating somewhat for the lower sales in other product categories. With these and other fundamentals remaining unchanged in 2012, minimal industry growth is expected, i.e., net premiums are likely to hold at 2011 levels.

At the same time, Canadian regulators have increased their scrutiny of the life insurance market, given significant capital pressures straining some life insurers in this volatile economy. Canadian life insurers nonetheless may be in a better position than their US counterparts to take advantage of expansion opportunities in the US, Europe and other areas troubled by recent market unrest.

Larger and well capitalized insurers may explore options for both organic growth and strategic acquisitions in those regions, although some foreign markets are becoming less attractive due to their own uncertain economic circumstances and increased competition.

 

 

Five emerging trends that will command management's focus in 2012 include:
1 Manage the company for the current volatile market and low-interest rate environment
2 Get a firmer grasp on cost containment
3 Understand and prepare for the impact of accounting and regulatory convergence
4 Drive efficiency and risk management improvement through technology
5 Embrace the internet



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