The overnight lending rate of Bank of Canada has remained as low as one per cent for 14 months in order to motivate economic growth during the world-wide commercial downturn and increasing risks.
The United States, China and even developing economies will also grow slower than formerly thought, while the European Union is falling into a relatively brief recession. These economic can, however, easily get even less favourable.
All this is bad news for Canadian insurers in all areas. Their income rely on interest incurred in investments of people’s premiums.
Revenues from premiums paid for life insurance are put into bonds—a very safe and simple financial instrument—and the interest revenue earned on these bonds may go to cover any insurance claims, overhead and other liabilities. Any such income left over will become insurance company profits.
Such historically low interest rates have put the screws to profitability for of insurance companies. Many insurers are offseting these rates by raising the premiums on their permanent life insurance life insurance plans. BMO Insurance, Canada Life, Industrial Alliance, Manulife, and Empire Life have all bumped up the fees on their fixed-premium universal life coverage. Manulife even decided to stop including this type of policy in its permanent offering. It is quite likely that other companies will decide to do the same in the near future.
The situation not likely to improve, judging by the fact that central banks both Canada and the United States are claiming that they are planning to keep low interest rates for the foreseeable future.
On the bright side, a select number of smaller Canadian insurers have carved out a niche by freezing their permanent plan premiums.
If you are interested, read more on the adverse effect of the current interest rate trough on pensions and government employees.