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Canada's insurers misjudged their clients Add to ...

Canada's insurance companies have run into trouble in part because they underestimated the intelligence of their customers.

Moody's took a shot at the country's three largest insurers - Manulife Financial , Sun Life Financial and Great-West Lifeco - after digging into their latest, disappointing quarterly financial results.

The credit rating agency said in a report late Thursday that profitability at the big three is stubbornly stuck below historic levels due to the performance of guaranteed saving products sold over before the market tanked in 2008. These products - variable annuities and variable life policies - were largely invested in equities, but guaranteed clients a certain level of performance.

The three largest Canadian insurers took $4-billion in charges against these equity-linked policies over the past five quarters, according to Moody's. (It's worth nothing that Great-West takes justifiable exception be being including in this broadside from the credit rating agency, as the Winnipeg-based insurer made the wise decision to steer clear of many guranteed savings products.)

How did the insurers, supposed experts in balancing risks and returns, go so wrong on guaranteed products? Moody's crunched the numbers and found "two assumptions critical to valuing the actuarial reserves for variable annuities proved to be overly optimistic."

"First, life insurers assumed hat equity market volatility was such that a 25 per cent market correction would be a conservative downside stress scenario," according to Moody's senior vice president Peter Routledge.

"Second, they believed that some of their policyholders would refrain from capitalizing on the benefits inherent in their policies -- in short, certain policyholders proved to be more savvy than the life insurers expected them to be," said Mr. Routledge.

So in simple terms, when market tanked, customers made use of the guaranteed feature in savings products, something the bright lights of the insurance industry didn't expect from policyholders and their agents.

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