Life Insurance Companies | Sun Life Warns New Regulations Could Impact Ability To Carry Long-term Policies

By Sunny Freeman, The Canadian Press- 4 days ago

TORONTO — Canadian insurers may have to think twice about offering long-term policies to consumers if proposed international accounting standards come into force without a few alterations, Sun Life Financial’s chief executive warned Wednesday.

The proposed new rules will change the way Canadian life insurance companies calculate their liabilities. That could make their finances appear more volatile and hamper their ability to raise the reserves needed to back up long-term guarantees, Donald Stewart told reporters after the company’s annual general meeting in Toronto.

“The unintended consequences would be that it would be very difficult for insurance companies to provide longer-term guarantees and since that’s at the core of what we do, that’s a fairly significant issue,” Stewart said.

Pensioners and other shareholders should be concerned that long-term products such as pension plans could be axed due to the impact of the new provisions, said Michael Goldberg, a financial analysts at Desjardins Securities.

“Pensions? Forget it, insurance companies couldn’t offer those products anymore.”

The current draft proposal for Phase II of the International Financial Reporting Standards requires all life insurers to delink their valuations of liabilities ” unpaid present and future claims ” from assets. Stewart and a host of global insurers have criticized the method because it allows for too many fluctuations and unknowns.

The effect on longer-term products would be most pronounced because any small change in today’s valuations is spread over a longer period. Insurers would be required to put away bigger reserves for each year of a future liability, making longer-term contracts less profitable.

The answer, Stewart said, is to incorporate some elements of the current Canadian accounting system into a phase of the international regime set to be implemented in 2014.

“We believe that the fundamental principle that underlines the Canadian accounting system for life insurance companies is worthy of worldwide application,” he said.

“The closer we get to the principles of that system and the methodologies, the better we might be served.”

All Canadian companies are in the process of switching to International Financial Reporting Standards, which are intended to create a level playing field for financial statements from around the world. Sun Life (TSX:SLF) adopted the first phase of the new system in January and said it went smoothly.

Canadian companies currently match cash flows of assets to liabilities, by making a number of assumptions including interest rates, mortality and morbidity rates and investment returns. That means if rates change for assets, they also change for liabilities, smoothing the impact of short-term fluctuations.

But IFRS delinks the valuation of liabilities from assets, meaning a small change in long-term interest rates could create a big change in asset values but have no impact on liabilities.

The International Accounting Standards Board has argued the proposed rules would lead to a more accurate reading of insurers’ balance sheets, which vary around the world.

But Goldberg said volatility under the IFRS standards would be so great that insurers could go from being solvent one quarter to insolvent the next.

“From an investor point of view, the numbers would be that much more useless than they are now,” he said.

Stewart said the board made some promising moves towards addressing such concerns last year when IASB head Sir David Tweedie suggested the board did not have the proper formula and would revist the issue.

But since then, Stewart said, there has been much “toing and froing” among the board.

Rival life insurer Manulife Financial Corp. (TSX:MFC) has also recently spoken out on the proposed changes, saying they misrepresent the financial health of Canadian insurers, which could put them at a disadvantage relative to their global peers.

Further complicating the problem for Canadian insurers is another set of regulatory changes, known as Solvency II, that will bring stricter capital requirements in 2013 for insurers operating in Europe, such as Sun Life and Manulife.

“It is vital that Canada be very thoughtful in considering whether and how new capital standards be applied to life insurers,” he said.

Stewart said those more “onerous” capital requirements would make Sun Life more conscious of accounting issues in considering potential acquisitions. “There is a risk of applying capital when you’re not sure what the ultimate rules are going to be.”

Sun Life (TSX:SLF), with $464 billion of assets under management, has operations in Canada, the United States, Europe and Asia and employs about 16,000 people, including some 7,000 in Canada.

Shares in the company closed 28 cents higher at $30.42 Wednesday on the Toronto Stock Exchange.

Comments