PD-9: Challenges in a Low-Interest

Transcription

SEPTEMBER 2012 SEMINAR FOR THE APPOINTED ACTUARY – TORONTO (PD-9)
PD-9:
Challenges in a Low-Interest-Rate Environment
TR-9 :
Les défis d’un contexte de faibles taux
d’intérêt
MODERATOR/
MODÉRATEUR :
SPEAKERS/
CONFÉRENCIERS :
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Derek Wright*
Robert Bhatia*
Michel Giguère
Garry MacNicholas
?? = Inaudible/Indecipherable
ph = phonetic
U-M = Unidentified Male
U-F = Unidentified Female
Moderator Derek Wright: Welcome to Session PD-9, Challenges in a Low-Interest-Rate Environment. In this session,
we will be considering the impacts of the current interest rate environment on pricing, valuation, and capital
requirements. My name is Derek Wright. I lead the actuarial practice of Deloitte in Canada, and it’s great to be here,
particularly as one of the sponsors for this conference.
I’m joined this morning by Robert Bhatia. Robert is an assistant vice-president of life product development at
Transamerica Life. He has extensive experience in the life insurance industry in Canada, principally in the areas of
pricing and product development. He’s been with Transamerica for over six years, during which time he’s participated in
the launch of various universal life and term products and more recently, critical illness.
Next to Robert is Garry MacNicholas. Garry is senior vice-president and chief actuary of Great West Life, where he has
held many roles in Canada and in the UK over the past few years, and you can ask him how many years. Prior to
becoming chief actuary, Garry was the head of Great West Life’s reinsurance business.
At the far end, Michel Giguère, one of my partners at Deloitte, who leads our practice in Québec. Michel also has many
years of experience in the life industry, roughly the same as Garry, mainly related to the valuation of liabilities, solvency,
asset liability, and so on. He’s worked in a number of organizations and was at Université Laval before joining Deloitte.
As we know, interest rates across the world, in particular in Canada, are very low at the moment, and this is having quite
a large impact on the Canadian life industry, as can be seen from some of these headlines from early August. Interest
rates now are probably at the lowest they’ve been for many years, if not ever. We can see here the gradual reduction in
the Canadian 10-year bond rates from the peak in the early 1990s.
A similar pattern in the U.S. and a similar pattern in the UK; a lot of these major bond rates have been coming down
constantly for the last 20 years. You can see from looking at both the 10- and 20-years bond rates, over the last five years
there have been significant falls. There may have been, or has been a bit of a pickup in September compared to August,
and in the Canadian bonds and the U.S. bonds, although those have fallen again in the last few days and in the UK
bonds. Is this the end, have we hit the bottom, or is it still going to go up a bit more?
More importantly, why are bond rates so low at the moment? Probably one of the striking features of the financial scene
today has been the extraordinarily low level of interest rates of these bonds of all the major industrial nations. Ten-year
bonds issued by the UK governments are at the lowest point since 1703. Probably can’t say the same for either Canada
PROCEEDINGS OF THE CANADIAN INSTITUTE OF ACTUARIES
Vol. 23, September 2012
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SEPTEMBRE 2012 COLLOQUE POUR L’ACTUAIRE DÉSIGNÉ – TORONTO (TR-9)
or the U.S. because their governments weren’t there to issue bonds in 1703. But as we saw yesterday, Canadian bonds
are at the lowest now since 1935, probably before that.
Over this past summer, yields in Germany and in Switzerland for their two-year bonds actually turned negative at one
point, so we had the remarkable situation where investors were actually having to pay governments money to lend
money to those governments. Probably didn’t last very long.
Not everyone, though, has benefited from low interest rates, despite yet another bailout of Greece and unlimited bond
buying by the European Bank. The rates in Greece are something like 10 times the rates in Germany.
Even though there are very high levels of government borrowing, it doesn’t seem to have deterred investors from buying
government bonds. In the U.S., the 10-year bonds have risen in value by 11 percent since Standard and Poor’s actually
downgraded the American debt rating, citing concerns about the ability of the government to control the deficit.
A number of factors appear to be at work. Demand for safe assets has risen as the uncertainties confronting the world
economy have risen. Investors are willing to pay a premium to insure against the risk of big declines in the value of their
capital. So in many countries, investors continue buying government bonds, despite the fact that interest rates on bonds
have failed to keep place with inflation over those same years.
Declining growth expectations in the industrial world point to lower returns on risky assets, such as equities. This
process has supported demand for government bonds and thus reduced yields. Government bonds do offer protection
against the risk of deflation. And then, on top of that, there’s been quantitative easing in a number of countries with
central banks buying government bonds on a huge scale.
Finally, in many countries, regulators have been requiring banks to invest more and more in government bonds to build
up capital. All of these things continue to push down interest rates.
So, what happens next? Are the current yields just something we’re going through, an odd phase, and they will return to
norm, however one defines norm? Are the current yields the new norm? Or probably like me, many of you just have no
idea what’s going to happen next. But just thinking about it, yes, is this just a short-term hiccup, and are bonds going to
return to normal, whatever normal might be soon?
I think that’s what was said in Japan, when interest rates fell probably 20 years ago. As we can see from this picture, for
the last, since 1998, bond yields in Japan for 10-year bonds have been 2 percent apart from a very short period of time in
about 1999. Ten, 12 years, everybody thought it was only going to be a few weeks and they’d go back up. Over the 20
years, Japan has experienced weak growth, which has been peppered with bouts of falling prices. Borrowing by Japan’s
government has soared, yet the 10-year Japanese bond rate is, at the moment, just 0.8 percent. So short-term always it’s
what we’re here to see.
On that happy note, let’s turn to the panel to get their views on pricing, valuation, and capital. First, Robert.
Speaker Robert Bhatia: Thank you, Derek. As Derek said, my name is Robert Bhatia. I am the assistant vice-president
of life product development at Transamerica Life Canada. Before I begin, I would just like to point out that there was, at
the last CIA Annual Meeting this past June, there was a similar presentation called Product Development in a LowInterest-Rate Environment by Emile Elefteriadis, Andrew Kugler, and Pierre Vincent. I’d like to thank them for allowing
me to use some of their slides and content for this presentation.
As you’ve heard, the industry is facing what has been called the “perfect storm”. Accounting rules in the future are
uncertain, regulatory requirements are being scrutinized and strengthened, there’s going to be changes to tax laws
impacting universal life, and of course, interest rates are at the lowest point they’ve been in decades.
I’ll be discussing the low-interest-rate environment, the impact of a low-interest-rate environment on individual life
insurance from a product development perspective.
Moderator Wright: Seem to run out of slides. The whole pack was sent to the CIA. Can you talk without slides?
Vol. 23, Septembre 2012
DÉLIBÉRATIONS DE L’INSTITUT CANADIEN DES ACTUAIRES
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Speaker Bhatia: Yes, yes, sure. OK. Well, the first slide was going to be a disclaimer saying that I don’t speak for my
employer, but I do. No, I’m joking.
(Laughter)
OK, so the agenda will be first I’ll provide a background on how interest rates have changed; I’ll provide an overview on
the Canadian marketplace in terms of life insurance sales; I’ll provide some background or I’ll give you examples of what
the industry reaction has been to the low-interest-rate environment in terms of product development; and I’ll give you
some sense of what I think we might expect going forward in terms of product development and premium generation for
Canadian life insurance companies.
First, I’ll provide some background on interest rates. Now, picture a scary graph that you’ve seen. Like most, well, like
some of you, since I’ve entered the life insurance industry, I’ve only known a decreasing interest rate environment. I’ve
seen profits deteriorate, policies not perform as they expected, and this has led to a lot of discontent among all the
stakeholders: policyholders, shareholders, management, board of directors, and consumers.
As you’ve seen in other graphs, interest rates from the early 1980s were over 10 percent and now they’re as low as 2
percent. As interest rates decline during this period of time, pricing actuaries were all hoping, well, interest rates will
rebound and so we’ll just stand pat on our pricing on our long-term guaranteed products. Unfortunately, this hasn’t
happened yet, and in 2010, companies started to react. They came to terms with the reality and said, “OK, we have to
do something.”
Now, unfortunately there are no slides, because the next one is pretty cool.
(Laughter)
This one was, OK. What I was going to show you was how like today the interest rates are very low, and some of you
might understand that over the long term, when you look at it over the long term, maybe today’s interest rates aren’t the
anomaly. Maybe the interest rates from the late-1970s to mid-1980s, maybe those were the anomalies. Maybe that was
the anomaly. Might have been a product of the economic and political situation of the time.
However, the interest rates today are at the lowest points not seen since World War II. So these are pretty low interest
rates. Maybe these are the anomaly, a product of the circumstances of the time. Maybe they’ll rebound, but I’ve got to
not think like—well, like I’ve been thinking for the last little while—and come to terms with the reality that they might
stay here. Even though interest rates are impossible to predict, financial pundits are saying the current atmosphere or the
current environment will be with us for at least the next five years.
OK. Now, my slides would have taken me to providing you an overview of the Canadian marketplace in terms of
individual life insurance sales. Products sold by life insurance companies can be classified across a continuum. At one end
of the continuum are risk protection products, and at the other end of the continuum are savings products. Products that
derive a significant amount of profit from the investment result are sensitive to interest rates, movements in interest rates.
And of course, long-term guaranteed products are one of these types of products. Therefore you’ll see products across
this continuum, and many of them are vulnerable to a low-interest-rate environment. When we look at the continuum,
we would see on the risk protection side term insurance, group life, disability, long-term care, critical illness, and payout
annuities.
In the middle – oh, great, are we online? Awesome. OK, cool. This is a cool graph. See? Downward trajectory, anomaly.
(Laughter)
I have to do this. Current rates, difficult to predict. All right, great. Here we are.
So here’s the continuum. In the middle, you have your whole life and universal life, variable life, and at the other end,
you have your savings products and you can see deferred, fixed, variable annuities, etc.
As I mentioned, all these products, anything with an investment whose profit kind of is reliant on the investment result
will be sensitive to low interest rates. But we all knew that, I guess.
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The main products sold in the Canadian marketplace that are vulnerable to low interest rates are universal life with level
cost of insurance, whole life particularly non-par, T100, permanent critical illness and segregated funds with the
guaranteed minimum withdrawal benefits. Now, this isn’t an exhaustive list, obviously, but this represents a significant
portion of the new business premium today.
Sales of whole life, term whole life and UL were relatively stable up until 2008, the time of the financial crisis. At this
point, we saw customers shy away from UL products and move towards term and whole life. Sales by premium count
have been relatively stable recently. Well, they’ve been stable from 2010 up until 2012. Term insurance still represents
the majority of sales in the Canadian marketplace.
However, when viewed by premium, you can see there’s been a large increase in the sales from whole life products,
mainly in participating products. This increase is coming at the expense of premiums to UL. Consumers are enticed by
the more stable and attractive dividend rates, which are based on portfolio rates on the par products. However, it should
be noted that 60 percent of the guaranteed products, 60 percent of our sales are coming from guaranteed long-term
products, so this emphasizes the importance of these products in the Canadian marketplace. As George Bush once noted
that Americans were addicted to oil, so too are Canadians addicted to long-term guaranteed products.
All companies sell through advisors, either captive or independent. It is interesting to note that the career channel tends
to focus on whole life products and the independent channel sell more UL, but the proportion of whole life is increasing
in the independent channels quickly. In fact, based on recent statistics that I saw the other day, it’s almost caught up.
Whole life in the independent channel equals UL sales, almost. But it’s important to note that the sales in the career
channel are considered less price sensitive, and this can represent and opportunity for companies that have a career
channel.
In the Munich Re pricing survey, companies were asked which products were priced profitably. I’m sure many of you are
familiar with this survey. The profitability for long term products, well pricing actuaries have been saying that the
profitability from 2008 to 2012 has deteriorated significantly for the long-term guaranteed products, as you can see.
However, it is interesting to note that actuaries have been indicating since 2008 that UL with level cost of insurance is
not priced profitably, and it was not until 2010, as I mentioned, when companies started to act as interest rates kept
falling and losses kept mounting.
So what are the key consequences of a low-interest-rate environment? Of course you know that there is significant
strengthening of liabilities on in-force. There’s lower earnings and profitability on new business and in-force, particularly
on a market-consistent basis. There’s higher sensitivity to interest rates, higher required capital, and we have concerned
stakeholders.
With that, what has been the industry’s primary response to this unfortunate economic environment? Well, companies
have increased prices, fees have increased on segregated funds, and rates for level cost of insurance have increased more
than 50 percent since 2010. Companies have also practiced a middle-of-the-pack pricing. So everybody wants to sort of
peg against one company and not be an outlier because they don’t want to get the undue amount of unprofitable LCOI
sales. Companies have lowered fixed guarantees on universal life accounts. They’ve also lowered dividends, and this could
lead to a reduction in sales in the future, but I’ll mention par a little bit more later on.
These changes are not done. We have already heard that there’s going to be another round of price increases to come in
the next few months. How else have companies responded? Another technique they’ve used is to try to limit sales. What
one company, my company, used was to cap the amount of competitive UL, level cost of insurance, at 500,000. This
strategy was clear when we looked at our business and saw that a significant portion of our losses were coming from a
relatively small number of large LCOI cases.
Companies have also attempted to de-emphasize unprofitable products in their marketing. Of course, given the urgency
of the problem, some companies have simply withdrawn their products from the market. This has mainly affected the
guaranteed minimum withdrawal market, but we are seeing that companies are pulling out of the life market in sort of a
deliberate way on the long-term products.
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Companies also are focusing on distributors and advisors that are selling a profitable product mix, so advisors that might
sell ART or term 20 or something like that, they’ll get companies starting to focus their marketing on them as well.
Finally, companies have been presenting alternatives to consumers that may better meet their needs to lure sales away
from, well, not lure, but to sort of identify the consumer’s needs better, to balance out the consumer’s needs and the
company’s needs. For example, if a client needs income protection that decreases with time. So you’re a young family,
you need a certain amount of insurance to cover off your mortgage, etc., but once your mortgage is paid off, that will
drop off. So that’s a decreasing income protection need. What they will do is say, “Well, you don’t have to buy all that in
LCOI right now. You can buy a reduced amount of LCOI permanent coverage and layer your temporary need with
some term insurance.” That’s shifting. So what would have been a maybe $500,000 LCOI sale is now a $100,000 LCOI
sale coupled with a T20 rider, which will help profitability.
Also, instead of buying a $500,000 LCOI and minimum funding it so you develop no fund in 20 years, why not
consider an ART policy? So if a client thinks they might need access to funds in 20 years of paying premiums, they
might consider an ART policy.
Companies have tried to increase or encourage sales of ART by lowering the cost of insurance at the later durations.
They’ve also tried to entice the brokers to sell it by increasing first-year compensation, but more on ART in just a couple
minutes.
So, what can we expect? You’ve seen how the companies have responded to the challenge of low interest rate. They’ve
responded in a variety of ways, but what can we expect going forward? In my view, it’s going to take a dual-pronged
approach, one that encompasses product development and one that encompasses sales process development.
Let’s focus on the product development first. How might products change, going forward? Before addressing this, it
might be interesting to see how products have changed in the past as interest rate environments have changed. Prior to
1960, when interest rates were relatively stable, whole life was the staple product. As interest rates began to rise,
adjustable products based on the then-current new money rates became popular. At the same time, par whole life became
less popular as the dividends lagged behind the new money rates.
During the bull markets of the 1990s, we saw that universal life became the industry’s flagship product. Now, as interest
rates continue to fall, whole life is becoming popular again for the same reason it fell out of favour in the late-1970s.
Dividend rates, which are based on portfolio rates, are higher than the new money rates available on UL products. But in
a prolonged low-interest rate environment, the dividend rates may not be sustainable.
What are the options? Well, there could be a move back to simpler products that target the middle market. These
products could have distinguishing product features, such as simplified underwriting. That would make the product less
price sensitive.
As I mentioned earlier, there could be more improvements made to UL with increasing level cost of insurance, or ART
or YRT, however you may refer to it. However, shifting sales from LCOI to ART might prove challenging because the
markets today are pretty volatile and advisors are just, the advisors that serve the middle market are not comfortable
enough selling this product. And as I mentioned earlier, consumers today are used to having guaranteed products and
they want to have a product where they can just pay it and forget it. They don’t want to have to worry about whether the
markets went up or down. It’s going to be, as the products stand today, it’s a tough proposition. We might see
improvements in that to make that a little bit more sellable.
This also might be an opportunity for the reintroduction of adjustable products. Adjustable products are products, well,
you would price at the current interest rate, and if interest rates went up, the premium would reduce. If interest rates
continued to fall, the premium would increase. Canada has one of the few companies to sell guaranteed long-term
products, and discussions regarding adjustable products are coming up more and more frequently in the industry.
Canadian consumers in the past have been very closed off to this. They’re not very interested in it, but with industry
effort and with time, consumers may become more open to this product if marketed, priced, and managed appropriately.
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I’ve gone through product development. Now let’s turn the attention over to process development, sales process
development particularly. The improvements to the sales process will also be required as insurance companies will need
to distinguish themselves for reasons other than price. One approach could be the development of sales tools. Companies
would try to provide consumers with a service. They would provide them with their complete financial picture and try to
provide solutions to that. They could bundle less profitable products with more profitable products so that it meets the
client’s needs and also meets the company’s profitability needs.
There could also be improved access to information for consumers and policyholders and advisors, and this would be
viewed as a value-added service, which could translate into slightly higher rates. Again, the idea is to reduce price
sensitivity.
The other thing we do and focus on is the sales process in terms of the time it takes for an advisor, when he fills out the
application, the time a policy is settled or issued. This has not changed in decades, and the insurance company is well
behind other industries in making technological improvements with this key aspect of their business. So I think
companies are going to have to move towards shortening that time an advisor is in front of a client. He sells something
and he gets instant approval, and I’m sure you’ve heard about initiatives in the industry to move us toward that.
In conclusion, although this is a difficult time for the insurance industry and we may be facing the perfect storm, we
must view this as an opportunity to get closer to our clients, understand their financial needs, and provide creative
solutions that meet the needs of all stakeholders.
Thank you.
(Applause)
Speaker Garry MacNicholas: Good morning. Thanks Robert. That was very interesting. Cool slides, by the way. I
don’t have very many cool slides. I could’ve been the one up here without slides and I don’t think you would have
noticed. Let’s get this going here, if I have slides. Maybe I will be the one without slides.
OK. Going to cover the landscape. Probably won’t spend a lot of time. Just in case no one has been in the room for the
last few days or in Canada for the last few decades, interest rates are falling. The current mindset, though, that’s
something we spent a little bit of time on. This gets to perceptions. Is this the new normal, this whole phenomenon?
They said, “Get used to it, it’s the new normal.” And just as people are saying it’s never going to change, rates are going
to be low forever, that’s when the rates will probably go up or down further.
Also, a little bit on past lessons. That’s another part of the mindset: once you get into a certain environment, you might
forget the lessons of the past. What’s an inverted yield curve? How does that happen? What about book value payouts
when you have market value assets? What about term mismatch? Why wouldn’t we just back some of these daily interest
problems with 10-year bonds because rates aren’t going to go up? Got to be a little careful on that.
As I say, and then we’ll get into some valuation considerations, which is of course what I was actually asked to speak
about. Bull market in Canada, that’s the interest rates and we’ve all seen that; don’t need that. There’s a picture you
probably haven’t seen. This particular one you’ve seen eight or 12 others like it. I think the only interesting thing about
this is if you had a mirror image of it on the left-hand side, you’d actually get almost the same picture going back 30
years, to the early 1950s. Let’s keep moving.
Oh, the Canadian stock market performed relatively well during the 1980s, 1990s, and early 2000s, and it made up for
the decline in new money yield. So that’s for those companies that had equity exposures, and those would’ve most likely
in the day been in a few areas. Surplus funds of companies, certainly pension plans of companies, a lot of the big, defined
benefit plans had quiet equity components, so that was quite helpful through that period. Participating accounts, that
would’ve helped them perhaps keep that portfolio yield from dropping too quickly, depending on the mix of assets. And
of course sales of segregated funds and mutual funds really took off, particularly during the 1990s.
If I go over to the next page, this is as close as I get to a cool slide. This has the TSX five-year rolling total returns and the
10-year Government of Canada bonds. Robert’s slide did a nice job of pointing out . . . I wish I’d put par portfolio yields
on here because that really ties it together, where you see the product choices Canadians make as they chase yields,
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generally historic ones. If you ever watch seg fund sales, I used to do a bit of this business, it’s always fascinating;
everywhere else I’ve been in terms of, or you go to buy cars, you go to buy TVs. Whatever you buy, if it’s on sale, it’s
really good except for seg funds or mutual funds. If the price goes down, it’s bad; if the price goes up, it’s really good.
Just the way those things work.
I remember trying to get a marketing message across. We were doing our brochures in 1990, and when we printed the
brochures out, it was kind of unfortunate that the three-year return for one of our equity funds, one of our flagship
funds, was 0.0. Sort of wonder, if you had to round, but yes, it came out as 0.0 and I thought, well what a great idea!
We’ll say, “On sale now at 1987 prices!” That’s why I didn’t have a long career in marketing, I guess.
(Laughter)
At any rate, you can see how through the 1990s, with the TSX twice in that fairly brief period, the five-year rolling
average is over 16 percent. That’s remarkable. It’s no wonder we fall into a bit of complacency around, “Surely we can
guarantee returning their money after 10 years; how could that possibly go wrong?” Anyway, obviously the last few years
have been a little more interesting as the chart trails off rather decidedly, disappointedly down towards the bottom
corner.
So, the current mindset in terms of investment analysts; thought we’d get a couple of quotes from these guys. Insurers
are being hit from all sides: weaker sales, volatile equity markets, tapping debt or equity markets for capital, and of course
this is leverage or dilution, take your poison. Generally speaking, not a happy place to be.
What’s the Business News Network want to say? “Low interest rates taking their toll on the company’s life insurance
business.” That’s happened a fair bit now. I particularly like this one. This is Peter Routledge of National Bank: “Life
insurance used to be [the quintessential] safe and boring [business in Canada]. No more. It is a terrible industry to be
invested in right now.” i And that’s not really a good thing for our industry because we actually depend on capital to fund
our growth and keep our industry very strong and performing well going forward. This is quite important.
So I started to think, what would be behind such a comment like this from an investment analyst? You’ll often hear the
story, markets do not like uncertainty. Let’s have a think. Financial services regulation around the world, Basel III for
banks, what does that mean for insurance? A lot of financial services regulation uncertainty. Overhaul the capital regime.
OSFI did a good job; they got the roadmap out, it’s a good document. If I’m an investment analyst, so I’m thinking,
hang on a sec; they’re going to completely overhaul the capital regime, have no idea what that’s going to do. They’ll see
the platitudes. Well, we’ve got roughly the right amount of capital. They’re going to be nervous. It’s uncertain. There’s a
big overhaul, not sure how this whole new regime is going to work.
Accounting, ah, there’s one. That includes valuation in this. I’m not just going to blame the accountants. The whole
accounting regime, the only thing certain about IFRS is that it’s probably not next year.
(Laughter)
But in terms of volatility, it’s been well recorded that, while our current methods are quite volatile, IFRS could be even
more so. Could be, we don’t know. And we don’t know when and we don’t know what the impact’s going to be on all
sorts of business, particularly insurance business got a lot of air time. So that adds to uncertainty.
Then, of course, just basic fundamentals. We have had lower sales, particularly in the wealth businesses, which are a big
part of a number of the companies. So you’ve got quite a big of uncertainty. I didn’t even throw in equity markets and
other volatility. Needless to say, that doesn’t bode well for an industry to invest in.
Now, we also thought we’d take a little poll and get some of the mindsets. Clearly, the investment analysts are not too
happy. What about some of the senior leaders in the industry? We went to a couple of different companies and got some
perspective on what the impact to the low-interest-rate environment is, the companies and their families, friends.
i
Words inserted from slide.
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First few outtakes, this is kind of fun. The first one, well, that really talks to the house price boom. With the house prices
roaring ahead, how am I ever going to get my kids to leave the house? That’s an interesting way to look at it.
The second one. Now, I don’t know who put that in there, but I have some advice for them. They should read the
transfer value on marriage breakdown rules for defined benefit plans and see a marriage counsellor. It won’t be cheap!
Then, of course, I like the last one as well. A “friend;” it was a “friend” who increased his mortgage. We all have friends
like that, right? Oh, it was a “friend!” They increased their mortgage to go play the stock market. Now, you laugh and
everyone says, “Oh, that’s . . .”, but I just did a little bit of work. Say, I don’t happen to be, but say I was a Royal Bank
customer. If they’d been advertising their 3.5 percent home equity one-two punch home equity line of credit, and if I
took that 3.5 percent, it’s tax deductible, and I turned around and just put it in Royal Bank shares because you know
banks are very safe, the dividend yield is about 4.3 percent. And that gets favourable tax treatment. So I get a spread, I’m
protected. What could possibly go wrong, one might be tempted to think? You can answer that question yourself. So
anyway, it was kind of interesting to look at it that way.
What did the survey actually say? Key areas of impact, these won’t come as a big surprise: guarantees, sourcing
investments, and not just referring to yield here. We have to keep in mind that when companies are thinking, well, yield
is really under pressure, we do have other characteristics of investments that are quite important to keep in mind. The
quality of investment, the ratings and the ability to actually pay you back. Diversification is always helpful. Term and
matching, that’s something to keep in mind. Resist the temptation. Liquidity is another potential issue.
So these are elements. There’s a little more to investment sourcing. Pricing actions, one of the respondents, and I
thought it was a great term, spoke of re-price fatigue. Certainly on the life side that would be people are going through, it
seems, constant re-pricing exercises. I would observe though, and maybe it’s because I spent some time on the wealth
side including payout annuities, those are re-priced weekly, sometimes daily, as rates are moving. And it’s just a mindset
situation. There you’ve got long-term promises that you’re making. You’re getting some money, you’re making longterm promises. And you’re trying to match those, and so you really price each week based on rates. Go to life insurance,
and certainly for the non-participating new money account, say at term 20, let’s say for a minute it wasn’t going to be
renewable. You’ve got a block of relatively fixed cash flows, and maybe there’s not as much money to invest, but you can
actually do a reasonable job, so is it just a mindset issue that we don’t think of re-pricing regularly on our nonparticipating side the way we do on annuity side?
There was a bright young actuary back, I can’t remember his name, and he worked in one of the smaller companies. And
I remember them having rate series for T100. As rates would change, they would have their rate series. They were lining
that up. It was just an interesting food for thought. But as we try to keep pace with constantly changing new money rates
as that becomes more in vogue on the life insurance side, people are talking about fatigue.
Terms of ranking for the most to least significant impact on the industry, and I think these are fairly significant. So when
I say “least” I think it was just a relative comment. A higher cost at guarantees; that’s fairly self-evident. Reduced
availability of high-yielding assets. I would insert the word “suitable” in there. There are great deals on Greek bonds if
you’re seeking yield.
The next one is also interesting. Existing product offerings are no longer meeting evolving customer needs. And I find it
reads just as well if I exchange two words: evolving product offerings are no longer meeting existing customer needs as we
start to reduce and take away guarantees, and Robert alluded to this, as we cut back on guarantees that customers
currently love. So we have to think of it both ways.
Greater sensitivity to further drops in interest rates. Obviously, just the basic convexity the size of the drops, the
relationships aren’t linear, but there are also other elements at play. When you cross below, especially in our current
valuation set-up, when you cross below certain thresholds in your guarantees, depending how you’re valuing them, they
go from not having much cost to having a lot of cost fairly quickly, and again, not linear.
This last one, this focus on short-term financial results by external audiences. Now, part of that is just the nature of the
quarterly treadmill that the investment analysts might be on. There’s one of the external audiences I’m referring to. But
we also have to look in the mirror a bit here and look at our financial reporting basis, our valuation basis ourselves, and
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say, “Are we really helping or exacerbating this particular issue on the short-term focus?” When we decide we want to
present-value the impact of what just happened last quarter over the next 40 or 50 years and put it all through the
earnings and then we wonder why people are curious as to what’s going on.
Moving along, on the current mindset, let’s see if I’m even on the right page here . . . Reduced ability to afford? Is that
the one?
U-M: Yep.
Speaker MacNicholas: Excellent! I’m glad I got back to the real world. I get really carried away with that quarterly
volatility stuff and it gets me all discombobulated when I think about what we’re doing to those poor analysts.
OK. Key areas of impact of the low-interest-rate environment to a client. Now, this is one, maybe I wanted to forget this
because I check my own level COI product, which fortunately I bought years ago when I was actually pricing them. In
other words, the agents aren’t going to trust the cook if they won’t eat their own food. So I bought one back then and I
paid $2.38 per 1,000. And I went and I checked and today that same policy, now, of course mortality’s improved; this
was about 20 years ago. So mortality’s improved 25 percent? You take your pick. Anyone can have a go. There’s been
quite an improvement. What’s the price? $5.56. That’s a 234 percent increase. Of course, if I was to buy a brand new
one today, that would be $14, just over $14, so there’s no way I’ll be lapsing that puppy. I don’t know what lapse
assumption they’ve got on me, but . . .
(Laughter)
Sorry, what lapse assumption I’ve got on me, now that I think about it.
(Laughter)
At any rate . . .
So the other thing to note that the price increase over that 20-year period is almost the same as the age change is worth
for 20 years. So that’s just because one went up 230 percent and the 20-year older price was 260 percent higher than the
earlier one. Anyway, obviously that’s going to impinge on people’s ability to afford products, and I’ve heard from Robert
that it’s not necessarily over yet.
Dropping additional benefits like LTD, that’s more a group insurance comment, but you are seeing some. It’s coming
into just cutting back what benefit plans are offered. I guess I could’ve thrown in the blindingly obvious one in terms of
benefits that are offered. Defined benefit plans, they’re doing really well these days in terms of being regularly offered.
They’re just way too expensive in the current world.
Then, of course, you get behaviour around clients. Now, the other advantage of having one of those old UL plans is I
believe the minimum guaranteed interest rate is 4 percent. I don’t know what actuary priced that. Moving swiftly along;
should be taken out and shot.
OK. Now we get to the bit I was asked to talk about. It’s not as much fun. Valuation challenges or considerations.
Model risk, we’ll talk a bit about that. Behaviour risks. Now here I’ll be focusing on the policyholders and the advisors,
not necessarily the valuation actuaries, the Canadian Institute of Actuaries, or the regulators, all of whom may be subject
to behaviour risks in this environment as well. Measurement of optionality. That’s just a couple of comments on that.
And then our standards and guidance coming under some stress, and I think Dave covered that well today, in the session
just prior.
Model risks, really I think the bottom line is the punch line here. Have you checked your models lately? You want to
watch out for those little formulas that made a lot of sense when you threw them in. Oh, let’s say, I don’t know,
inflation; it used to have a remarkable correlation with, say, the five-year government rate minus 3 percent. That’s not a
bad take on it. That works really well. Doesn’t work so well now; you end up with very funny results if you don’t go in
and check.
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That one’s a fairly obvious one, but there may be some other little ones in there where you’ve got relationships that have
been built in between rates. You just have to keep your eyes open for that. And that’s something that obviously we’re
doing as well.
Behaviour risk, and as I say, this is really focused on the advisors and the policyholders. The assumptions that we
would’ve had for the election and usage of options when they were first put in, or even just in if we look at last five years’
history, may not be a good indicator of how those options may be utilized next year or the year after in this environment.
We’ve had the assumptions set when there was little experience of when the options really are in the money. How much
more money will people dump into those universal life policies that have the 4 percent minimum guarantees? How will
that affect lapses? What will people do with their premium? And there’s a lot more options; I just happened to pick on
that one because I have one.
These product design features, they were thought to be benign when we put them in. And the example I use there I did
mention earlier, the seg fund guarantees. So we put on the guarantee of getting your money back over 10 years. But
because that was so benign, we didn’t really pay a lot of attention to how we’re going to handle partial withdrawals.
Should that be pro rata or maybe just dollar in/dollar out? Then, oh what about those management expense ratios, or
actually 2.5 percent a year? So actually it’s not just zero equity returns; you’ve got to make a fair bit of money just to get
zero.
Oh, and then policyholder fund moves. There are some great slides. Those of you who may be interested in this,
policyholders invariably underperform the funds because they’re chasing around yields, and they invariably move at the
wrong time. So if you haven’t captured that sort of risk, and there are lots of people who’ve done slides on that, just the
policyholder trading risk within their own product. We didn’t, because the option itself was benign, the controls around
when it might be, how to keep it benign were sometimes lax. I think we’ve learned a lot of those lessons.
Measurement of optionality. Here’s a bit of an open-ended question: is it possible to get a reasonable estimate for an
option using a deterministic application? I think in those circumstances, you tend to get “yes” or “no.” Does it have a
cost? Well, if it’s a 4 percent guarantee and assume rates are 5; no, 3. Rates are 3? Oh, it’s expensive. Now, obviously I’m
making it simplistic, but one of the issues with deterministic approaches is you don’t really pick up values for optionality.
Of course, the stochastic modelling has its challenges, as we’ll get into.
Now, valuation standards and guidance, and we’ll get through here shortly. I guess prescribed scenarios, going to spend a
bit of time on that. This could be considered, perhaps this is another example of being introduced in relatively benign
times. They seem sensible at the time, but have we really kept them up to date? And that’s an open-ended question. I
think there is a lot of work underway now and my own personal view, as you’ll no doubt find out in the next few slides,
is that perhaps we haven’t kept them up to date. But I’m very glad to see we are taking action and I’m looking forward to
being involved in that.
I look at prescribed scenario #9. Again, it seemed sensible at the time. The sentiment has changed now, I’d say in many
but certainly not all circles. And it’s important to bear this in mind because this type of topic can be divisive in the
profession, so we need to keep an open mind to the variety of views here. We can’t just say, “Well obviously everyone
thinks this”, because it happens to be maybe 60 percent or 70 percent or 80 percent of the profession. So it is not
necessarily a universally held sentiment. CLIFR and, I see, the ASB are actually working on changing this.
But I look at this one, particularly in the long-term business in Canada, and I say, and this wouldn’t be unusual in some
of the companies, I have no cash flows really to invest for the next 20 years because I’ve got to really try to do cash flow
matching, certainly for 10 and largely over the next 20 years. So should my reserves and capital position by extension,
because if my reserves go skyrocketing, my retained earnings tend to go the other way. My capital position, my reserves
go dramatically moving around, based on the latest post-meeting communiqué from a few bankers and speaking over in
Europe or what the Fed said after their meeting last week, or three weeks ago or five weeks ago. I mean, these things
move around quite a bit. But now that this scenario is often the defining scenario, you can find it to be quite volatile in
some organizations.
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Let’s look at prescribed scenario #1. Now, the URR and future URR change implications are starting to be picked up by
the analysts. And this is, well, to all those good news/bad news, at least the analysts are aware that the ultimate
reinvestment rate exists in some of our scenarios. How they’re using it, though, just from being on the quarterly calls, it’s
a little disconcerting. I think there’s a wide range of knowledge within the analyst community. Some know exactly how
it’s used, what it’s used for; I’ve seen one of them here at the meeting. There are others, though, that it’s a more
rudimentary approach.
Certainly I know I’ve been asked the question, “What’s your URR?” And it’s a very difficult question to answer,
especially when you’re defining scenarios that are different across all sorts of dimensions, different across regions. Certain
things that aren’t aggregated, or you’re holding reserves in some areas that go beyond the prescribed scenario. So you’re
really, it’s a difficult question to answer and that doesn’t go over well with the analyst community who think it should
just be [finger snap], you know, “Everyone’s got a URR; just tell me what yours is.”
Is this lagging measure giving us the most meaningful and appropriate information to set our C3 provisions, because it is
the defining scenario, or close to it, I think, for a couple of companies? Then you wonder if that’s a five-, 10-year rolling
average, and I do like the element that it’s a little more smooth. It’s not going up and down with the latest post-meeting
communiqués from some bankers. However, it does become the defining scenario. And how, well this is an interesting
one, it’s because and I was corrected. I always refer to it as assuming no yields, 20 years from now, and gradually you
work your way there. Actually, what it is is assuming our reinvestment strategy changes so that we’re only investing in
government bonds of a certain duration 20 years from now.
I do question, and again it may have seemed sensible at the time, but an insurer’s business model. A long-term life
insurance business model is largely predicated on you making long-term promises. You secure long-term regular
premium in-flows, and you make long-term investments, a lot of long-term investments in infrastructure, in long-term
lending and so on. And the insurance companies are well-positioned to do this because they have the commitments that
they’ve made, they’re long-term. So there’s a matching element, and they’ve got ongoing liquidity provided by the
tremendous regular premium in-flows.
If I had to explain to my board that “we’ve assumed we’re going to just stop doing that and we’re only going to invest in
government bonds, sort of starting now but blended over 20 years”, I’m glad I never have to actually explain what’s
behind this because they’d look at me, “You’re assuming what? Sorry, that’s going to go away?” My point there is not
whether the scenario is a good one to be testing in our work, but if it’s your defining scenario and you’re trying to
explain to your board why your results have moved, it’s a more difficult conversation to have with someone that hasn’t
read the prescribed scenarios.
Stochastic applications. Obviously there are challenges here. Calibrating and maintaining models, operational control
requirements, complexity. Is that what’s really going on in there? It’s a little harder to spot when something’s a little off.
The rules of thumb are much harder in a stochastic world to see that.
I found it interesting when it came up in the session earlier, and it reminded me of this. There’s a bit of a parallel here in
our actuarial practice with what’s been going on in the regulatory world. You’ll see it in Solvency II, these internal
models versus just a formula-based approach for capital. It was alluded to earlier as we look at the new capital regime
coming with OSFI. There’ll be an internal model focus with that regime, but there will also be factor-based approach for
those that are not on them.
And if you think about what we’re doing in the CIA, you could make a parallel that we’re now getting these stochastic
models and for those not using them, well actually, that’s not quite true. But one might say we do have a factor-based
approach, our equivalent being the prescribed scenarios. The issue we’ve got now is we’re kind of in between. We’re
saying, well, we’ve got all these stochastic developments, but we don’t really want to let go of our factor approach, our
prescribed approach. So we’re going to have to come to grips with that as a profession, as we make that move. And then
what that means for the narrowing or widening range of actuarial practice because there are knock-on implications of
that.
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Additional deterministic scenarios. I do think it’s a good idea. There are good insights that can come from testing certain
boundary conditions and having a look. You can get into a lot of questions that have too little guidance, too much
judgment. I don’t really have any qualms if they’re not necessarily the defining scenarios. I think if we just have one
single scenario and that becomes the defining, you could be all over the map in terms of actuarial practice, so we have to
be thoughtful.
But adding deterministic to a stochastic environment to my mind, certainly for me I would—maybe I’m just old
school—but I would still continue to get some insight from that. I’m not sure I’d be booking my quarterly reserves on
scenario 9 if I didn’t have to going forward.
With that, I think I’ll turn it over to the next panellist. The slide says, “Questions,” but I think we’re too early for that.
Thank you very much.
(Applause)
Speaker Michel Giguère: Good morning, ladies and gentlemen. So it is now my turn to bring you good news about the
low interest rates. I will cover the impact of the low current interest rates on capital and solvency ratios. My presentation
will be made in French, but my slides are in English, so you should be able to follow that quite easily, I think. And since
my presentation is not very long, I think that you’d better try to understand rather than rush to get the devices, because I
just have eight slides. But it should be very easy to follow.
Alors bonjour Mesdames et Messieurs, comme je le disais je vais traiter de l’impact des bas taux d’intérêt sur le capital et
excédants ainsi que sur les ratios de solvabilité. J’ai identifié une dizaine d’impacts qui sont divisés entre les impacts sur
les passifs, les impacts sur les actifs et d’autres sur les garanties du fond du sein. Alors on va regarder ça ensemble.
Bonjour Mesdames et Messieurs. Comme je le disais, je vais traiter de l’impact des bas taux d’intérêt sur le capital et les
excédents, ainsi que sur les ratios de solvabilité. J’ai identifié une dizaine d’impacts qui sont divisés entre les impacts sur
les passifs, les impacts sur les actifs et d’autres sur les garanties des fonds distincts. Alors on va regarder ça ensemble.
Au niveau des impacts sur les passifs, on dit que les taux d’intérêt évidemment ont des impacts sur les taux de
réinvestissement. On sait que les normes de l’ICA nous amènent à calculer un taux initial de réinvestissement et un taux
ultime de réinvestissement. Alors, comme vous le savez, plus les taux d’intérêt sont bas, plus ces taux-là ici vont être bas,
ce qui a pour effet d’augmenter les passifs, et puis les passifs augmentant, évidemment le capital disponible est réduit.
Voilà un premier impact, donc la compagnie a moins de capital disponible.
Ensuite, les exigences qui sont calculées en pourcentage des passifs tel que le risque C-3 des appariements. Évidemment,
comme les passifs sont plus hauts, l’impact est plus élevé parce qu’on prend un pourcentage des passifs et les passifs se
sont accrus; donc on aura des exigences qui augmentent. Et puis finalement, au niveau des exigences pour les déchéances,
bien évidemment les taux d’intérêt étant plus bas, les exigences aussi qui sont calculées sur un scénario de passifs avec des
taux d’échéance additionnels sont plus hauts. Donc, encore une fois, on a un accroissement des exigences. Donc en
résumé, une réduction du capital disponible et un accroissement des exigences, évidemment ça va dans la direction de ne
pas favoriser les résultats de solvabilité.
De plus, on remarque qu’il a été observé par expérience que plus les taux d’intérêt diminuent, plus les impacts sur les
exigences au niveau des déchéances sont grands. Donc pour la même baisse, disons de 10 points de base de taux d’intérêt,
les exigences au niveau des déchéances vont être plus grandes.
Ensuite, d’autres impacts sur le passif : les bas taux d’intérêt vont accroître évidemment les passifs pour les invalidités en
cours. Alors encore une fois, cela aura pour effet premièrement – si on accroît les passifs, ça diminue le capital c’est sûr,
mais en même temps, comme les exigences de morbidité sont calculées en pourcentage des réserves dans ce cas particulier
des rentes, alors on a une augmentation des exigences. Ensuite, au niveau des rentes en cours de paiement, on a un peu la
même chose que ce dont on vient de parler. On a des passifs qui montent, puis on a des exigences qui augmentent parce
qu’encore une fois, celles-ci sont calculées, quand on parle au niveau des rentes de paiement, en pourcentage des passifs.
Donc on a une augmentation des exigences.
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Et finalement, le seul élément positif mais très petit, votre montant net au risque diminue tellement légèrement et vous
avez une exigence de mortalité un peu moindre, mais il s’agit d’un écart minime et non très important. Alors c’est un
effet vraiment minuscule, mais quand même c’est le seul que j’aie réussi à trouver qui pouvait avoir l’air positif pour les
sociétés d’assurance.
Ensuite, au niveau des scénarios, comme en parlait Garry, la question des scénarios 1 et 9 est importante. On sait que
dans le scénario 1, on fait des moyennes mobiles; les taux ultimes de réinvestissement sont des moyennes mobiles
calculées sur 60 et 120 mois. Alors évidemment, lorsqu’on a des taux qui baissent, la moyenne mobile baisse. Donc on a
un impact défavorable mais on dirait en français « smoothy », un impact amorti par le fait que c’est une moyenne mobile.
Donc on n’attrape pas le plein impact, on attrape un impact légèrement amorti alors qu’évidemment, on sait que le
scénario 9 est basé sur les taux courants. Donc si les taux d’intérêt baissent bien, toute la baisse vient impacter le niveau
de taux, donc on obtient un taux ultime de réinvestissement qui est égal au taux initial de réinvestissement. Alors en ce
moment-là évidemment, on frappe l’effet complet d’un coup au lieu d’avoir une espèce de méthode de moyenne mobile
qui va l’amortir. Alors on comprend très bien qu’à ce moment-là, avec le scénario 9, on a encore plus d’effets, encore plus
de sensibilité défavorables lorsque les taux d’intérêt diminuent.
Ensuite au niveau d’impacts sur certains actifs, si on regarde par exemple les immeubles : alors si évidement les taux
d’intérêt sont plus bas, on comprend très bien que la valeur des immeubles va augmenter, ce qui fait que pour des
immeubles qui sont appariés au passif, au segment d’assurance ou au segment de rente, on va avoir évidemment un
capital requis pour le risque C-1, le risque de défaut d’actifs, qui va être plus grand parce qu’on sait que les risques C-1
sont calculés en pourcentage des actifs. Donc on a une augmentation du capital requis pour le risque et puis, comme on
est dans un système, là on parle d’un exemple où on est apparié avec des passifs, alors la méthode canadienne axée sur le
bilan, comme vous le savez, fait que les impacts d’actifs se reproduisent dans les impacts de passifs. Donc on n’a pas
vraiment d’impact sur le capital disponible mais on a, comme on a parlé, une augmentation des exigences.
Pour de l’immobilier qui serait détenu dans les segments de surplus de capital : les surplus, mais à ce moment-là
évidemment, on a aussi l’accroissement du risque C-1 parce qu’il est proportionnel à la valeur de l’actif. Mais à ce
moment-là aussi on a un accroissement du capital disponible parce que ça s’est reflété dans le capital à ce moment-là.
Évidemment l’effet net dépend de l’effet relatif des deux éléments. On a comme un capital requis qui augmente, mais un
capital disponible qui augmente aussi; lequel augmente plus que l’autre dépendamment aussi du niveau du ratio qu’on a
en jeu. L’effet peut être neutre, négatif ou positif.
Ensuite d’autres impacts sur les actifs au niveau des obligations : pour les obligations qui sont appariées encore une fois
avec les segments d’assurance ou de rente, évidemment le capital requis pour le risque C-1 va augmenter de la même
façon dont on a parlé pour les immeubles et puis ça va demeurer neutre au niveau du capital disponible, parce qu’on est
dans un système d’appariement. Donc les fluctuations d’actifs sont reflétées dans les fluctuations de passifs.
Pour les obligations qui sont détenues au surplus ou dans le segment du surplus et qui sont désignées comme disponibles
à la vente, on va observer un accroissement du capital requis pour le risque C-1 de défaut d’actifs. Puis cela va demeurer
neutre au niveau du capital disponible parce que l’augmentation va aller dans les résultats étendus dans l’OCI [autres
éléments du résultat étendu] comme on dit aussi bien en français. Alors en allant dans le compte des résultats étendus, les
éléments ne sont pas reflétés immédiatement à moins qu’on dispose des obligations; à ce moment-là on va avoir un effet
sur les résultats.
Pour les obligations qui sont détenues au segment du surplus et qui sont désignées comme « Held for Trading » c’est-àdire détenues aux fins de transactions : pour ces éléments, on va avoir un accroissement du capital requis pour le risque
de défaut d’actifs C-1 et puis on va avoir aussi un accroissement du capital disponible, du fait qu’il y a une augmentation
de la valeur.
Maintenant, on va traiter un peu des éléments reliés aux garanties de fonds distincts. Pour les garanties de fonds distincts,
le capital requis va s’accroitre dans le sens où si on regarde l’exigence qu’il y a au niveau du nombre de capitalisation, on
va faire une espérance conditionnelle unilatérale au niveau de 95 %. Alors c’est notre passif du CTE(95) (comme on dit
bien en français aussi) [qui] va s’accroître plus vite que le passif qu’on détient au livre, que le passif actuel calculé qui peut
14
être par exemple calculé au niveau de l’espérance conditionnelle unilatérale à 80 %. Donc les taux baissant, on a plus
d’effets sur le CTE(95) que sur le CTE(80). Donc on a une exigence de capitalisation qui augmente.
Le capital disponible ne devrait pas changer si on a un système de « hedging » ou de couverture (comme on dit en
français) qui décroît. Donc si on a un bon système de couverture, la perte qu’on peut faire est compensée par les éléments
de couverture qu’on a mis en place. Donc on ne perd pas au niveau du capital disponible, mais on a une exigence de
capitalisation, comme on a dit au point précédent, qui augmente.
Ensuite, le capital disponible va décroître si le risque d’intérêt n’est pas « hedgé » ou n’est pas couvert (pardon, donc si on
n’a pas de programme de couverture). Évidemment, les taux d’intérêt baissant, on a des coûts qui vont rentrer dans les
résultats financiers, puis qui vont venir baisser notre capital. Donc on aurait un deuxième effet à ce moment-là si on n’a
pas de couverture.
Donc, en résumé, pour les questions de fonds distincts, les exigences de capital ne donnent pas de crédit particulier pour
reconnaître la valeur du « hedging ». Donc le « hedging » sert à éviter qu’on fasse des pertes mais en même temps, les
exigences de capitalisation demeurent quand même aux niveaux telles qu’elles sont définies. Donc, même si une
compagnie se protège en faisant du « hedging », elle va quand même avoir un impact au niveau de ses exigences de
capitalisation.
Donc, en résumé, on peut voir malheureusement que les bas taux d’intérêt ont des effets négatifs ou des effets qui ne sont
pas favorables au niveau des ratios de capitalisation. De façon générale, comme je vous l’ai dit, j’ai trouvé une petite
exception mais elle ne vous aidera pas beaucoup au niveau des montants nets à risque. Alors, qu’est-ce que les
compagnies peuvent et veulent faire pour essayer de minimiser cet impact-là? L’approche la plus évidente, c’est d’aller
chercher du capital additionnel. Moi, j’appelle ça un peu l’effet Tylenol parce qu’en réalité, ça ne résout pas le problème;
ça fait juste enlever un peu le mal. Vous savez, ça donne un petit répit : mais pas si fort mais d’autant plus fort qu’on va
aller chercher du capital. Mais en réalité, le mal reste là. C’est une question : on le compense par une hausse d’autre part.
Et puis, les compagnies vont beaucoup faire; elles vont aller chercher des capitaux additionnels, elles vont aussi améliorer
leur appariement actif-passif parce qu’évidemment, si on a un meilleur appariement actif-passif, on est moins sensible à
ces effets-là sur les taux de réinvestissement.
Donc par exemple, une compagnie améliorant son appariement va réduire l’impact du taux de réinvestissement. Donc
elle pourrait avoir moins d’impact (comme on vient de parler). Ensuite, évidemment, l’autre possibilité c’est de rallonger
ses actifs pour à ce moment-là avoir un impact qui va être moins rapide sur le taux ultime de réinvestissement, parce que
le taux ultime de réinvestissement étant une moyenne mobile, c’est sûr que si on a réussi à avoir des actifs plus longs, il
vient en considération plus tard dans le processus d’appariement. Donc on reporte à plus loin, plus on est apparié long,
plus on reporte à plus loin les effets négatifs du taux ultime de réinvestissement.
Finalement, les compagnies vont utiliser ce qu’on appelle des (encore une fois en bon français) des « inter-segment
notes ». Ce sont des ententes entre les segments qui font que, par exemple, si vous avez un segment d’assurance qui a un
volume de primes important qui rentre de façon régulière et d’autre part, vous avez un segment de rentes en cours de
paiements qui elles ont des décaissements réguliers, on va faire une entente entre les segments comme quoi les primes
d’assurances servent à aller financer les décaissements au niveau des rentes et puis les primes sont perçues, les primes
uniques sont perçues au niveau des rentes, servent à faire des placements plus longs pour le segment d’assurances. Donc
c’est une entente entre les segments qui fait qu’à la fin, on optimise la situation financière de la compagnie. Alors ce sont
dans ces types d’exemples que les compagnies essaient des fois de se garantir. On pourrait dire des actifs, essayer de se
garantir des taux futurs avec différentes techniques qui sont les plus intéressantes possible. Puis je vous dirais aussi que
dans le fond, le jeu là-dedans c’est que les compagnies, on pourrait dire, visent à battre le taux ultime de
réinvestissements.
The companies are striving to beat the URR in the sense that even though the URR is not a very great rate, if you are
able to obtain some returns that are better than the URR, then you improve your financial statement situation. So it’s
not necessarily a great solution because the rates are low anyway, but if they are a little higher than the URR, then you
have some gain in the financial statement.
15
Alors je veux juste le répéter rapidement en français, comme si on va chercher des taux ultimes plus grands que le taux
ultime de réinvestissements, bien on fait un gain au niveau des états financiers même si ça n’est pas un gain
extraordinaire au niveau des rendements comme tel qui est obtenu. Alors ceci termine ma présentation, merci.
(Applause)
Moderator Wright: We have a few minutes if there are any comments or questions anybody wishes to raise of any of the
panel.
U-M: Just one quick observation. On one of Michel’s last slides, it implied in English that improving asset liability
management is less sensible. I just wanted to make the point that le mot sensible en français c’est sensitive en Anglais. So
that’s “sensitive” up there, not sensible. OK?
(Laughter)
Speaker Giguère: Thanks. Thank you.
Micheline Dionne: My question is for Michel. Michel, I guess what you told us in your slide is that the capital
requirements are somewhat sensitive to interest rates. So I was wondering if there are people that have started to think
about how they invest their surplus in regards to that sensitivity of the capital. Because you’re talking about asset liability
matching as opposed to asset to capital requirement matching.
Speaker Giguère: I’m not sure, you mean how people will try to invest the surplus part of their…
Mme Dionne: Yes, knowing that there’s some sensitivity, like surplus is there to provide for the capital requirements. If
those are sensitive to interest rates, should it change your view on how did you invest your surplus?
Speaker Giguère: OK. Well, that’s a good question. I think the company will try to invest their surplus in a way that
permits them to have interesting returns overall probably, but I’m not sure that they will be able to do something that
would relate specifically to the sensitivity on the liabilities.
Luc Farmer: Micheline, Luc Farmer.
Moderator Wright: Ah, can we, I think Garry just had a comment.
Speaker MacNicholas: I just add as well, because on that, if a company had invested some of its surplus in somewhat
longer assets, as rates fall, it would have gains. Now, currently the gains aren’t recognized in the, they go through the
OCI unless you sell the investment, they go through the OCI, but largely that was the industry working with us is that,
you know, it would be too volatile to be putting those gains in. So we got what we asked for but there’s a bit of a tradeoff there. So I think some companies are hedging that. It just may not show up in their ratios but at least they know they
would have the option to have the unrealized gains if they could realize those gains.
Luc Farmer: That was my comment, that we’ve been helping companies because even if you’re perfectly matched, and so
you don’t hit in your income statement because interest rates go down, your asset will go up, your liability will go up,
and still you’re required surplus will go down. So you have to do some testing on how much of that is going up.
You need to invest your surplus in a certain duration that it will equal your assets, even if it’s in OCI. If you’re really
going to go bankrupt, you just have to sell those assets and buy them back. So you’re immunized against the increase in
C3 risk and in lapse risk, but you have to test this. And we’ve got companies who do this already because I think pretty
much everybody is aware of this volatility with interest rate, even if you’re perfectly matched. You have to invest your
surplus long enough to compensate for the increase in the required surplus by the increase in your asset value.
Speaker MacNicholas: I’ll add one little caution to that, and that is that the increases you pick up through the OCI on
the bonds. It’s market value gains are available capital, whereas the requirement tends to have a higher price tag if you
want twice as much available as you have requirement. You have to bear that into your matching as well, as I’m sure
you’re well aware, but just for the group there’s that subtlety there as well.
16
Nadine Gorsky: Hi, I’m Nadine Gorsky from OSFI and I just want to thank all the four speakers. I think this is really
an interesting session coming at the question from a number of different perspectives. I found it really helpful.
I wanted to comment on what I perceived as one of Garry’s slides suggesting that maybe some actuaries are having
difficulty explaining the rationale behind some of the existing CIA scenarios. I know there’s a lot of controversy about
that and I’m certainly not speaking saying there’s a particular view that OSFI has; I’m just speaking as an individual
actuary and how I would explain scenario 1, for instance, in the URR. I think I would explain it to a board by saying it
has to do with the expanding funnel of doubt, that very far out, we don’t know what the government yields are going to
be, we don’t know what investment policy we will necessarily have, and that’s why we have a somewhat prudent
assumption based on a moving average in the case of scenario 1, and we’re trying not to upfront profits that we’re
predicting we might make in the future.
The other aspect that we all need to pay attention to is that this is for the in-force liability and we’re not supposed to be
taking into account new business. Certainly on a going concern basis, we take all sorts of risks. But as time passes if you
only look at today’s in-force liability, it’s going to become a shorter and shorter duration product that will be more and
more matchable. Some of those assets that we’re using, we could argue that there would be a smaller risk appetite
associated with this business as the duration gets shorter and shorter to maturity, and so it would be appropriate to
choose a prudent reinvestment assumption for this block that we’re assuming no new business from.
One other comment that I’d like to make on a different topic is to do with Michel’s. I thought that was really
interesting, a comprehensive look about what the impact of low interest rates is. But just in terms of the use of real estate
to support liabilities and what impact low interest rates has on that, I think we just, we have to not forget that when real
estate values are high, what happens in our actuarial approach is that the value that we expect to realize from that real
estate over time as we, in the future years we project it will be sold to pay the benefits, that does increase the realized
value of that real estate. Also, we have a historical approach to developing real estate returns. When we have had up to
today a very high return on real estate, some actuaries are projecting we’ll continue to have that high return. That has
some important implications that we need to think about.
Moderator Wright: Thank you. Do either of you want to respond?
Speaker MacNicholas: Yes. Just a comment. It’s a good clarification in terms of expanding the scenario and I think
when making the comments, I believe very much that when I’m describing to a board or another audience that we are
testing a wide range of possible future reinvestment scenarios, especially as I say, in a lot of the conversation we might be
focusing on what’s going to happen more than 20 years from now and if any of us thinks we have any idea.
If I actually describe the wording about the change in strategy, it’s much more difficult. I tend to do exactly as you just
described, that we need to be prudent, we need to describe and be resilient against a wide range of future reinvestment
scenario sets. Because I have that view that there’s a wide range, and it doesn’t really move, it’s a big, wide range. I have it
sort of diametrically opposed to be updating this 20-year view or 25- or 30-year view every quarter. If there’s a wide
range of uncertainty, I didn’t learn anything last quarter that helps me predict rates 30 years from now.
I think you made a very good point that the way to explain it is to go that way. My comment was perhaps a bit harsh,
refocusing just on the strategy, but the way we’ve got it worded makes it difficult to describe it specifically. I do take your
point that there are good ways to answer that question.
Moderator Wright: OK. Well, thank you very much to Michel, Garry, and Robert for your sessions and contributions
this morning. This session is now adjourned. Thank you.
(Applause)
[End of recording]

PD-9: Challenges in a Low-Interest

Transcription

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