Friday, May 22, 2009

Canada's Life Insurers need stricter rules, not taxpayer bailouts

Today we learn in the Reuters article below that erstwhile Finance Minister Flaherty is providing a form of indirect taxpayer bailout of Canada’s insurers. What this article fails to point out is that Canada’s insurers brought much of their pain upon themselves by entering new lines of business like variable rate annuities that were not properly hedged and/or insured.

It was motivated by an arbitrary and selfish desire to help bolster the sales of variable rate annuities that Canada’s insurers lobbied Harper and Flaherty to kill income trusts, which were a formidable competitor to the sale of this kind of synthetic investment product of the life insurers. Harper and Flaherty complied, using the falsehood known as tax leakage, as their false policy rationale.

Meanwhile these insurers were going well beyond the scope of their expertise and traditional and predictable life insurance business, These new lines of business were not insured in many cases. So here we have life insurers moving into new lines of business that was not insured? As a sole consequence of that, we now have taxpayers providing indirect bailouts of the life insurers? This is an outcome that was exacerbated by the actions of Harper and Flaherty. Its a good thing the global financial meltdown occurred when it did. Only if, however we take action the addresses the source of these problems and not the symptoms, as Flaherty is doing today. These life insurers should be stopped from issuing these types of products, if all it does is imperil them as financial institutions whose business is LIFE INSURANCE. Here is what others are saying about the need to change the rules governing Canada’s life insurers gone amok:

Billionaire Warren Buffett
on Sunday criticized some life insurers for taking on "crazy" financial risks by selling variable annuities, or retirement products that promised unrealistic guarantees to buyers. The products are tied to stock market performance and in some cases guaranteed a certain periodic return, while principal could not be eroded by investment losses. "I always thought they were crazy when they were doing it," said Buffett, at a press conference in Omaha, his hometown, because of the financial risks to the insurer.

Kin Lo, a professor at the Sauder School of Business, said Canada's top insurance companies had strayed from responsible business practices."Insurance is about protecting people from risk and what we have seen is the insurance industry going out and seeking risk," he said."It is in the nature of insurance that these companies should be fairly conservative in how they go about their business. "What we saw in the last few years is insurers getting away from conservatism," he said.

Bottom Line:
We need new and much stricter rules for Canada’s life insurers run amok, or this problem and systemic risk to our financial system will just repeat itself again in the future. Meanwhile where is Flaherty’s proof of tax leakage on which he killed income trusts for Canada;s life insurers? Where is Jack Layton’s proof of tax leakage on which he killed income trusts, for whatever inane end purpose he had in mind?

Canada unveils assistance facility for insurers

Fri May 22, 2009 11:40am EDT

TORONTO, May 22 (Reuters) - Canadian Finance Minister Jim Flaherty unveiled details of an assistance facility for the country's life insurers on Friday aimed at ensuring the firms have access to the funds they need if credit markets seize up.

The program, similar to one already available to the country's banks, was promised in the federal government's January budget in a bid to put Canadian insurers on an equal footing with foreign competitors who are benefiting from guarantee programs provided by their governments.

While Canadian insurers have seen their profits suffer or vanish amid a drop in business and huge investment losses, their balance sheets are relatively solid and the credit facility may never be needed.

In unveiling the program in January, Flaherty noted that many foreign governments had introduced debt guarantee programs to help their banks and insurers raise funds, and Canada wanted to make sure its firms were not at a disadvantage.

"The facilities are not meant to replace other funding options for Canadian financial institutions. Rather, they are being made available as a backstop in case conditions in global credit markets disrupt Canadian lenders' access to the funds they need to keep lending," the government said on its budget website.

Several U.S. insurers said last week they would accept government bailout funds, while others have enough capital to forgo the cash injections.

The life insurance sector, both in Canada and abroad, has been hurt in recent months by weaker financial markets that caused investment losses and higher costs for annuity products that are affected when market values fall.

But nearly all of Canada's banks and insurers have successfully tapped debt and equity markets in recent months to raise funds, proving credit is available.

The government guarantee plan is designed to bring confidence and liquidity to domestic credit markets, lowering indirect funding costs and helping insurers or banks get cheaper financing when they need it.

Under the program, companies wanting to issue insured debt will be required to enter an agreement with the Canadian government. Ottawa will then offer a guarantee of timely payment for interest and principal payments for the wholesale debt instruments that qualify, and the insurer will pay a market-based fee on the amount of insured debt issued. (Reporting by Andrea Hopkins; editing by Rob Wilson)

1 comment:

Dr Mike said...

Bailouts abound , from Life Co`s to the GMs of the world as the CEOs continue to line their pockets with bonuses & stock options.

These companies are the preferred business model of the Canadian government.

The income trust model is not.

How many income trust companies have had the need to apply for a government bailout??

Tells you something does it not.

Dr Mike