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Low Interest Rates Increase Insurance Costs in Canada

By Edited Nov 22, 2015 0 0

In order to enable economic expansion during the world-wide financial slump, universal overnight lending rate in Canada has been kept at 1% since September 2010 and is forecasted to stay at this figure going forward.

Alongside Canada, the United States, China and even emerging countries will also grow at a slower rate than previously believed. European countries are undergoing a relatively mild decline, according to Bank of Canada officials. It is not set in stone, however, that economic statistics could not possibly get worse. International markets are very tightly interconnected and an adverse development in one country may spill over to another. Canada does, after all, depend on its exports and having healthy economies as trade partners is thus essential.

Canadian insurance industry does is not excited about these developments. This is because their profits count on interest incurred in financial investments.

Proceeds from life insurance premiums are usually used to purchase bonds—a very safe and uncomplicated investment instrument—and are left there to generate interest. This interest can cover any claims, responsibilities, and miscellaneous expenses. Any income left over will become profits.

Interest rate vs money balance
Credit: RambergMediaImages ( http://rambergmedia.com/ )

Historically low interest rates have cut back on the profitability of insurers. Many of them are offseting this interest income deficiency by adding to the price of their permanent life insurance plans. All major insurance providers have raised the fees on their fixed-cost universal life coverage. Manulife even resolved to remove this type of coverage from its permanent insurance line-up. It is expected that other players will do the same in the foreseeable future.

This is not likely to improve, since both Bank of Canada and the Federal Reserve are saying that they are going to maintain low interest rates for the foreseeable future.

One positive outcome of this situation is that this situation has prompted several smaller Canadian insurers to try to gain market advantage and freeze the price tags on their permanent coverage policies. This may shuffle the cards a little as clients will increasingly start turning to these alternative life insurance providers.



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