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Michelle Siu/The Globe and Mail

To boost returns, Canada's life insurers have pulled out all the stops. They've reassessed pricing, moved away from high-risk and capital-intensive products like variable annuities and sought out higher-margin offerings.

Now they may need to take another big step, according to Ernst & Young, by adding more risk to their asset portfolios.

Because persistent low interest rates, high household debt and the slow-growing Canadian economy aren't expected to change much in 2013, E&Y argues it's time to get more creative.

The good news is that some of the larger players have already started down this path. Sun Life Financial Inc.'s chief executive Dean Connor told Bloomberg TV on March 11 that one of the ways he is looking to increase spreads is by offering private loans. These are international loans of up to $250-million to finance infrastructure projects such as bridges.

Manulife Financial Inc. said Thursday it is pursuing a similar strategy.

E&Y also argues there's more room to cater to a younger demographic. "Today's consumers in generations X and Y have different product needs and buying preferences," the company said in its 2013 Canadian life insurance outlook. "Insurers need to reflect these differences in their value proposition to these younger consumers, especially in relation to their wide embrace of the internet, social networks, and virtual interactions and communications."

To reach these potential customers, E&Y suggests a focus on easy-to-understand products such as term life insurance and whole life insurance.

But at least the insurers now have some breathing room to re-tool, should they choose to do so. Even though interest rates are unlikely to rise dramatically in the coming months, and the Canadian government long bond yield has risen only a little since July's record low, market sentiment is much improved over last summer. And that has driven up insurers' stock prices significantly, said Peter Routledge, analyst at National Bank Financial, in a note on Manulife's fourth-quarter earnings.

"The fever for Canadian life insurance equities reflects a desire on the part of investors to leverage a portion of their portfolios to a rising rate environment," he said. "Thus, these investors have made a bet that interest rates will sustain the present upward trajectory since hitting all-time lows in the summer of 2012."

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)

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