Submission to Organisation for Economic Co-operation and Development Re: Consultation on Draft High-Level Principles of Long-term Investment Financing by Institutional InvestorsRelease Date: 05/24/2013 Staff Reference: Stephen Frank
May 24, 2013
Ms. Marta Rilling
Organisation for Economic Co-operation and Development
2 rue Andre-Pascal
75775 Paris cedex 16
Dear Ms. Rilling,
Re: Consultation on Draft High-Level Principles of Long-term Investment Financing by Institutional Investors
On behalf of the Canadian Life and Health Insurance Association (CLHIA), I am pleased to provide comments on the consultation document entitled Draft High Level Principles of Long-term Investment Financing by Institutional Investors (the "Consultation Document").
Established in 1894, the CLHIA is a voluntary trade association that represents the collective interests of its member life and health insurers. The Canadian life and health insurance industry protects almost 27 million Canadians through individual and group life insurance, individual and group annuities (including RRSPs, RRIFs, TFSAs and pensions) and supplementary health insurance. The industry also has a presence in over 20 countries around the world and provides financial protection to more than 45 million clients outside Canada. The Canadian life and health insurance industry holds roughly $600 billion worth of assets abroad and generates over $56 billion or 44 per cent of their total premiums from outside of Canada.
Comments on Consultation Document
We strongly support efforts to help policy makers design a policy and regulatory framework which supports institutional investors, including life and health insurers, to act in line with their investment horizons. The generally long-term nature of insurers' liabilities and corresponding investments underscores why they are traditionally seen as a stable source, and efficient allocator, of capital into long-term investments which helps drive economic growth. Moreover, insurers' investment profile is somewhat unique as they continue to receive premiums from policyholders even during an economic downturn and consequently continue to invest while other financial service providers may be either shortening their investment horizon, reducing their exposure or withdrawing altogether. In this regard, insurers play an important counter-cyclical and stabilizing role in the economy.
The Unique Role Institutional Investors Play
The focus of the Consultation Document is on facilitating and promoting long-term investments by institutional investors. Paragraph 4, under “Framework” references the traditional role institutional investors play in long-term finance. It states that insurers and other institutional investors are sources of long-term finance by virtue of the fact that they match their invested assets - namely bonds and equities - to the generally long-term nature of their liabilities. While accurate, this description fails to recognize the uniqueness of the insurance and institutional investor business model versus those of other financial services providers and does not address lessons learned from the 2008 global financial crisis. In particular, the financial crisis exposed the behaviour and associated risks of those entities that were chasing yield by investing longer-term versus those that were doing so in support of the fundamental nature of their liabilities, as is the case with insurers and other institutional investors.
We would therefore encourage, as part of the “Framework” section, further elaboration on why it is that insurers and other institutional investors are uniquely suited, and should be encouraged from a policy perspective, to provide long-term financing as compared to others in the financial services sector. To this end, we would suggest adding an explicit statement that long-term finance is ideally supplied by entities, such as insurers and other institutional investors, whose fundamental business structure results in longer-term liabilities and who are committed to long-term investment horizons. Such a statement would highlight the important role insurers play and reinforce the benefits, from a policy perspective, of finding the correct balance between regulation and encouraging institutional investors to make the needed long-term investments in the economy.
Demographics and Household Savings
In our view, the “Framework” section, which frames the discussion on how best to facilitate and promote long-term investment, understates the influential role demographics play in engendering long-term finance. Its impact on household savings should be expanded upon beyond the references in paragraphs 5 and 9. Household savings, particularly those earmarked for retirement, represent a significant source of funds for institutional investors, including life insurers, which are in turn channeled into long-term
investments. Due to population aging and the transition of the baby boomer generation into retirement, a large portion of countries’ household savings will soon be shifting from an accumulation to a withdrawal or payout phase. As such, baby boomers are shifting their wealth into shorter-term and more liquid investments, which is driving down the relative demand for longer-term investments. This macro trend will tend to depress the potential growth in the demand for longer-termed assets and further strengthens the case for policy makers to look for ways to encourage longer-term investing overall.
A clearer reference to the role of demographics and household savings would lend additional credence to the principles outlined under paragraph 2.2. We would further propose that this paragraph reference the fact that the 2008 global financial crisis has generally heightened households’ risk aversion thereby further reducing the stock of savings available for long-term investments.
The Importance of Appropriate Regulation
In recent years, the level of capitalization and regulation on life and health insurers has increased substantially with the objective of mitigating the risk associated with any future financial crisis. While having adequate capital and regulation in place is critical to a well-functioning financial services sector, it needs to also be reflective of the insurance business model and proportionate to the risks, particularly as it relates to the long-term nature of insurers’ products and services. To do otherwise may, inadvertently, discourage insurers from selling longer-term products with guarantees. The effect of this would be to reduce insurers’ assets under management and their ability to invest long-term. Worryingly, the reduced demand and availability of savings and retirement products also comes at a time when governments are less able to provide retirement assurances and guarantees themselves.
We would therefore suggest that Draft Principle 4 clearly indicate that policy makers and regulators need to design capital and regulatory requirements that are appropriate to the risks and the insurance business model thereby allowing institutional investors to continue to play their unique, long-term financing role in support of the economy. Inappropriate regulation will ultimately result in insurers having to re-price, reduce or even eliminate the availability of important long-term savings and retirement products for consumers with repercussions on their capacity to save for the long-term.
Accounting and Valuation
On the issue of accounting and valuation, highlighted in paragraph 4.3, the Canadian life and health insurance industry supports the goals of improving comparability and accuracy and increasing transparency for the benefit of investors. In its current form however, fair value rules under the proposed
international financial reporting standard (IFRS) create disincentives for insurers to invest long-term by encouraging the selling of shorter-term, versus longer-term, products with guarantees.
We would respectfully request that Draft Principle 4 be more explicit in the need to arrive at accounting and valuation requirements that achieve a balance between the interests of investors and the need to have an accounting standard that recognizes and supports the longer-term nature of insurers’ assets and liabilities. Financial reporting by Canadian life and health insurers must reflect the long-term nature of the business model and also economic reality. To do otherwise, risks undermining the availability of insurance contracts, which extend out 20 to even 50 years, and thus less premium income being directed into long-term investments.
Information Sharing and Disclosure
We are supportive of information sharing and disclosure, which is addressed under Draft Principle 7. As noted in the Consultation Document, efforts in this regard should take cost into consideration. We also believe that any international efforts that are undertaken with respect to information sharing and disclosure should seek to minimize any duplication of efforts that have taken place at a domestic level. In this context, Canada has a robust regulatory environment and we would be concerned with, for example, disclosure requirements that go beyond what is currently required domestically.
The Canadian life and health insurance industry appreciates the opportunity to comment on the consultation regarding high-level principles of long-term investment financing by institutional investors. Please do not hesitate to contact me if you have any questions on our comments or if further detail would be helpful.
(Original signed by)
Vice President, Policy Development and Health