Submission to Finance and Bank of Canada on Debt Management ConsultationRelease Date: 11/15/2013 Staff Reference: Stephen Frank
November 15, 2013
Ms. Marie-Josée Lambert
Chief, Debt Management Policy
Financial Markets Division
Department of Finance Canada
140 O'Connor Street
Ottawa, ON K1A 0G5
Mr. Marc Larson
Assistant Director, Debt Management
Funds Management and Banking Department
Bank of Canada
234 Wellington Street
Ottawa, ON K1A 0G9
Dear Ms. Lambert and Mr. Larson,
Re: CLHIA Comments on 2014-15 Debt Management Strategy Consultations
The Canadian Life and Health Insurance Association (CLHIA) is pleased to provide comments on the 2014-15 Debt Management Strategy Consultations (Consultation Paper). Our comments focus on the importance of, and the demand for, long-term bonds, including ultra-long bonds (i.e., bonds with a maturity of 40 years or longer).
The CLHIA represents companies which together account for 99 per cent of Canada's life and health insurance business. The industry, which provides employment to about 142,600 Canadians and has investments in Canada of almost $615 billion, protects about 27 million Canadians through products such as life insurance, annuities, RRSPs, disability insurance and supplementary health plans. It pays benefits of more than $66 billion a year to Canadians and administers more than 70 per cent of pension plans for Canada's small and medium-sized businesses and the vast majority of group RRSPs.
The Canadian life and health insurance industry is supportive of the government's recent efforts to increase longer-term bond issuance. Specifically, we were supportive of the government's indication in its Debt Management Strategy for 2013-14 that it would continue a temporary increase in issuing 10- and 30-year bonds, particularly towards the longer-term issuance. In addition, we also strongly support the government assessing the potential benefits of issuing bonds with a maturity of 40 years or longer or ultra-long bonds.
From the government's perspective, issuing ultra-long bonds would be good asset-liability management given the long-term nature of the government's assets. It would also support a broad investor base by attracting domestic institutional investors that are actively seeking longer-term investments. In addition, the issuance of ultra-long bonds would benefit the government by securing long-term funding in the current low interest rate environment, which would ultimately help meet the goal of raising stable and low-cost funding for the purposes of the government's financial needs.
The current prolonged period of exceptionally low interest rates has posed a significant challenge for Canada’s life and health insurance industry, particularly with respect to asset-liability management for the long-term products that we offer Canadians. In this regard, efforts by the government towards greater long-term bond issuance can help alleviate some of the strain and support the supply of long-term financial products to Canadians.
Demand for Ultra-Long Bonds
It is important to note that Government of Canada securities generally are in strong demand as they are viewed as a prudent investment. We believe this would hold true in the case of ultra-long bonds as well. In addition, the issuance of ultra-long bonds by the Government of Canada would be consistent with experience internationally. For instance, the U.K., Japan and France issue ultra-long bonds.
Long-term institutional investors represent a key area where we believe there will be strong demand for Government of Canada ultra-long bonds under various market condition scenarios. This includes Canada's life and health insurers which are an integral part of Canada's long-term institutional framework. Indeed, almost 90 percent, or $540 billion of the industry's $615 billion Canadian assets, are held in longer-term investments, making the industry one of the largest long-term institutional investors in Canada.
The industry's demand for longer-term investments, including ultra-long bonds, is a result of its underlying business model. Insurers receive policyholder premiums - sometimes spanning upwards of 50 years or more - prior to paying the related claim. The long-term and predictable nature of these liabilities, coupled with the need to match these long-term liabilities with long-term assets, means that insurers’ are naturally aligned long-term investors.
One challenge for the industry is finding investments with safe and stable yields that match the duration of its very long-dated obligations. In the absence of an appropriate duration-matching asset, such as ultra-long bonds, insurers face additional asset-liability management challenges and reinvestment risks. Both from a risk management and diversification standpoint, therefore, we believe there would be demand for ultra-long bonds by Canada's life and health insurance industry.
On behalf of the Canadian life and health insurance industry, the CLHIA appreciates the opportunity to submit comments on the Government of Canada's debt management strategy. We would be pleased to provide further information or to discuss any questions you may have, if you would find it helpful.
Original signed by
Vice President, Policy Development and Health