Spotlight on Canadian insurers: A unique set of challenges and opportunities


Compound Interests - Issue three

May 2, 2024

Welcome to the third issue of Compound Interests - Mercer’s perspective on the capital markets, asset management, and how you can get the most out of your investment portfolios.

In this installment, we’re taking a look at insurance portfolios - and the challenges and opportunities that Canadian insurers are facing, highlighting where Canadian insurers might have different perspectives and priorities from their global peers.

Insurers ended 2023 in a very different place than they began it. The Canadian economy - like most global economies - avoided a recession. But market volatility, combined with uncertainty around interest rates and persistent inflation, made for a bumpy year for investors. It was particularly bumpy for insurers, who rely on fixed income securities and the subsequent income and capital preservation attributes that they provide to meet their liabilities and create value. 

To take the pulse of investors in this sector, Mercer, along with our sister firm Oliver Wyman, asked investors about the key themes that will guide their investment decisions going forward. While the global results are fascinating, there are unique differences that jump out from our Canadian respondents. Of the 88 global participants, 12 responses came from Canada1 and in this issue of Compound Interests, we’re focusing on some of the most pertinent findings for Canadian insurers.

1. New regulations will bring new challenges: 

58% of Canadian survey respondents cited increasing regulations as a key challenge - a number far greater than the overall results (24%). Although not explicitly stated in the survey, anecdotally, Canadian insurers have expressed that existing regulatory frameworks (for example, the recent implementation of IFRS 17) and forthcoming regulatory requirements, including the climate risk management reporting, make this a continued challenge and burden for Canadian insurers.2

What’s next? After a year of strategically sourcing liquidity, insurers are now focused on redeploying cash in support of their primary objectives. To achieve this, many insurers are planning on reducing their liquidity and deploying cash into both public fixed income and private debt investments.

Canadian insurers have cash on hand, and want to deploy it. 67% of Canadian insurers (vs. 33% overall) stated that they expected the overall risk in their portfolio to increase in the next 12 months. And, 50% (vs. 38% overall) of Canadian insurers cited they expect overall liquidity to decrease in the next 12 months.3

2. A move to private markets - driven by uniquely Canadian factors:

In the current Canadian economic environment, private credit as an asset class presents many opportunities for insurance investors. Private credit can potentially provide equity-like returns, but without incurring equity-like volatility.

So it’s no surprise that Canadian insurers plan to increase their private market allocations (50% of Canadian respondents, compared to 39% overall). In addition, the limited domestic fixed income opportunities available, coupled with regulatory guardrails, limits the strategic asset allocation opportunities for Canadian insurers (58% Canadian respondents versus 30% overall). With a limited opportunity set and a capital charge advantage, it’s unsurprising that Canadian insurers are moving to private markets.4

However, private credit can be a complex space to navigate, as different opportunities will have different liquidity terms and fees. For example, the high fees that come with private markets were a top concern for insurers. 70% of Canadian insurers said this was a concern, compared to 58% overall.5 Working with a third-party consultant who can recommend best practices for deploying capital in private markets, manage the administrative burden, and negotiate fees can empower insurers to capitalize on the opportunities that private credit presents, while still concentrating on their core business. 

3. Sustainability – setting a net zero target

Canadian institutional investors take environmental sustainability seriously – with 80% of Canadian insurers citing that they have a net zero target for their portfolio. This is significantly higher than their counterparts in the United States (14%), Europe (38%) or the UK (50%).6

The number of insurers setting net zero targets is likely to only increase. However many insurers, particularly smaller and medium-sized insurers, have limited in-house resources or expertise to plot their transition to net-zero. It is a complex field, from policy setting to measurement, to reporting, to a lack of standardized and incomplete data from the asset management and investment industry. And while an organization’s leadership and stakeholders might see the necessity, the investment team may not have the specialized knowledge needed, especially in a market like Canada, where our economy is so skewed towards energy.

Mercer’s insurance investment consultants  are here to help your organization fine-tune your investment portfolio, capitalize on the latest investment opportunities, and plot your transition to net zero. Contact us today.


Today’s capital markets

After a truly strong finish to 2023, global stock markets continued their upward trend in 2024, with major indices like the MSCI World rising by an additional 11.7% in the first quarter. However, the bond markets had a more mixed performance as investors reevaluated their expectations of early interest rate cuts. Central banks are signaling a more relaxed monetary policy, but unexpected growth and inflation, particularly in the US, may delay rate cuts in some regions.

In Canada, inflation showed positive signs during the quarter, with headline inflation dropping to 2.9% in January7. This was the second month since 2021 that inflation fell within the Bank of Canada's target range of 1-3%.

What drove equity markets higher despite the prospects of higher rates for longer? Enthusiasm for artificial intelligence (AI) played a role, reflected in the valuations of companies expected to benefit from AI advancements. 

While the long-term impact of AI on productivity, labor markets, and corporate profits within the overall economy is still debated, Mercer is naturally interested in how AI may transform the investment management industry. We conducted a survey of investment managers  in our Global Investment Manager Database (GIMD™). The survey revealed that AI is widely used across investment strategies and research, extending beyond the traditional "quant" approach. Nine out of ten managers currently use (54%) or plan to use (37%) AI in their investment strategies or asset class research.

While our survey raised questions about what the definition of AI is to begin with, we also found that human portfolio managers are not becoming obsolete. More than half of AI-integrated investment teams reported that AI analysis informs, rather than determines, final investment decisions. Additionally, a fifth of teams reported that AI proposes investment decisions, which can still be overridden by human managers.

However, it is important to also acknowledge the potential dangers associated with AI in the investment context. The World Economic Forum's Global Risk Report 2024 highlighted misinformation and disinformation as the most severe global risks anticipated in the next two years. These risks, which involve the spread of false or inaccurate information, are complex and difficult to assess in an investment context. The integration of AI in the investment process further complicates these risks. Mercer is actively working with investment managers to analyze and understand the risks of misinformation and disinformation in portfolios. We look forward to sharing the finding with you in the coming months.

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