‘Bank run-type scenario’ at lifecos highly unlikely: DBRS

While life insurance clients may withdraw early from some policies, such as guaranteed investment contracts and deferred annuities, Canadian life insurers are at low risk of suffering mass policy withdrawals, DBRS Morningstar said in a new report.

“We recognize that the potential of a bank run-type scenario on an insurance company’s liquidity is quite remote, however, it is not nil,” the report said.

Silicon Valley Bank was seized by the U.S. Federal Deposit Insurance Corporation after it had to sell billions in assets and suffered a bank run. SVB relied heavily on long-term fixed-rated bonds, which dropped in value as interest rates climbed.

Insurance clients, for the most part, “cannot request money back for services already rendered,” DBRS Morningstar said, adding that with some products with investment features, payouts are subject to surrender charges and economic penalties that serve “as deterrents to mass policy withdrawals.”

The most liquid life insurance contracts are guaranteed investment contracts (clients can withdraw early but with a penalty) and deferred annuities (clients can withdraw but with a penalty that decreases over time), the report said. Whole life and universal life policies are less liquid, with cash surrender values that increase over time, while term life and insured annuities have no early withdrawal option.

The SVB failure “stemmed from the funding and liquidity risks that are unique to banking institutions,” the report said, adding the big four Canadian life insurers — Manulife Financial Corp., Sun Life Financial Inc., Great-West Lifeco Inc. and  iA Financial Group — valued “nearly all” of their investments, in their 2022 financial statements, at fair value through profit and loss.

“Insurers’ capital position remains robust and is reflective of any unrealized losses. We will continue to closely monitor the situation,” said Nadja Dreff, senior vice-president and head of Canadian insurance with DBRS Morningstar, in a statement.