Do Life Insurers Have Too Much Risk?

August 9, 2010

Last week Canada’s biggest life insurer Manulife announced a major quarterly loss due to the poor stock market and low bond yields. Most of the analysis and management commentary centred on the hope that the markets could rebound favourably to Manulife. Some claimed that this wouldn’t have happened in the U.S., because they don’t have to follow the same accounting rules, as if that changes the underlying reason for the loss.

My take is that those Canadian rules are in fact uncovering the company’s potentially high-risk position. This seems to be affecting other top Canadian life insurers, though apparently not to the same extent. The real question, though, is this. Why is a major life insurer in the position of showing a loss due to poor stock and bond portfolio decisions? Manulife is a life insurance company; isn’t its capital supposed to be safe?

Of course, these are just accounting rules, but when the financial crisis started in 2007, it started with adjustments due to accounting rules showing that there was something fundamentally wrong. Would hedging and other “risk management” techniques truly enhance the company’s risk position, or just offset one accounting effect with another? If you go skydiving, you can reduce the risk of injury through proper training, safety measures, and wearing a helmet, but you’re still skydiving. I contend that these techniques might mitigate some of the risks, but they can’t counter all the effects of being improperly exposed to inherently volatile markets.

Richard Martin is founder and president of Alcera Consulting Inc. He brings his military and business leadership experience to bear for executives and organizations seeking to exploit change, maximize opportunity, and minimize risk.

© 2010 Richard Martin. Reproduction and quotes permitted with proper attribution.

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