How P&C insurers are shifting their investment strategies to account for tariff uncertainty

Green colored dollar symbol stacks on background. 3d illustration. — iStock/mustifal

In the midst of economic turmoil, Canadian property and casualty insurers are attempting to shore up their investment yield and diversify their holdings by expanding into the private market, panellists observed at the AM Best’s Canadian insurance briefing last Thursday.

“Broadly speaking, in terms of the demand or the interest in private credit, I would say that it remains strong, but it has remained strong for the last few years,” said Steve Guignard, senior director of client solutions at Sun Life Capital Management. “Where I’ve seen an acceleration is in the number of Canadian companies that are now deploying in the asset classes.”

That includes property and casualty insurers, he added, although the strategy is more prevalent among life insurers.

Defining the private market

The term “private market” refers to investments in assets not traded on public stock or bond exchanges. This includes, for example, investments in private equity, private credit, venture capital, and real assets such as real estate and infrastructure.

Unlike public markets, private market investments are typically “illiquid,” meaning it takes longer to realize their value (for example, you don’t have access to the equity in your home until you’ve sold it, which is a long process). And so, making investments in private market assets requires a longer-term commitment.

Life insurers offer longer-term contracts, allowing them to entertain these longer-term commitments. But property and casualty insurers typically have shorter, one-year insurance contracts — auto and home insurance policies typically renew annually, for example.

That means P&C companies, to cover their liabilities, need funds for claims on shorter notice than their counterparts in the life insurance industry.

For this reason, P&C companies tend to invest more in stocks or bonds, which convert more quickly into cash, so they are able to access capital on short notice if they need it.

But as Doug Porter, chief economist at BMO Financial Group, noted at IBAOcon in Niagara Falls last week, the impact of tariffs on the financial markets seems to vary widely across the country.

“How are financial markets dealing with all of this?” Porter asked rhetorically. “I think the short answer today is, they’re not sure quite what to make of it, frankly.”

And so, as panellists noted at AM Best, some P&C insurers are choosing to invest more in private markets, in the hopes of a higher return.

Insights Paid Content

Why innovative customer experience will define the future of personal auto insurance

Technology is helping insurers reimagine how they support personal auto customers — and it starts the moment a collision is reported, say experts at Accident Support Services International.

But the higher returns are associated with higher risk. And so it’s important for corporate boards and company executives to educate themselves on the risks they are taking, said Jacqueline Friedland, executive director of the risk assessment and intervention hub at the Office of the Superintendent of Financial Institutions.

Risks of private market

“An investment mix has implication for an insurer’s risk profile and ultimately financial resilience rating that OSFI assigns,” she said. “Traditionally, life insurers have relied on high quality bonds and equities to meet their long term liabilities. However, prolonged low interest rates and the need for higher returns and diversification have led insurers to increase their investments in alternative assets, which include private equity, real estate, infrastructure, hedge funds and private debt.

“Alternative assets offer the benefit of diversification [and] higher potential returns [in] alignment with long-term liabilities…..

“However, the benefits come with risks like valuation, uncertainty, illiquidity and complexity that requires robust risk management.”

All panellists agreed P&C companies investing in the private market need to be aware of the risks associated with the assets they’re holding.

Guignard observed private market assets are not “homogeneous” in the same way stocks and bonds are.

“If you tell me, ‘I’ve just implemented a short Canadian corporate bond portfolio, I can give you the characteristic of that portfolio fairly to the dot,” he said. “There will be slight differences here and there, but they’re well-defined asset classes — the structure of the bonds are all the same. It’s easy to understand and there’s not a lot of fluctuation.

Also in the news: U.S. specialty insurance firm to acquire SSRU

“It’s the complete opposite in private credit. It spans the risk spectrum…from investment grade to below investment grade. It goes further than that, [spanning] across geography, across different type of bond structures, and so the complexity of the asset class is definitely there.”

That means P&C investors need to do their homework if they want to invest in the private market, said Gord Dowhan, Chief Financial Officer of Wawanesa Insurance.

Since it’s not a homogeneous product or investment, “look at the underlying assets,” Dowhan advised insurance company investors. “The underlying assets could be airplanes, they could be mortgages, they could be mineral rights. [It’s about] really understanding the underlying assets.”

Another thing to consider is OSFI’s commercial lending limit, he added. This limits how far Canadian P&C insurers can invest in the private market.

For instance, OSFI has imposed a default commercial lending limit of 5% of a financial institution’s assets. The limit can be exceeded only with supervisory approval, and if the company maintains at least $25 million in excess of its liabilities and required capital margins.

If a company’s excess capital drops below this limit, OSFI may not consider the loan to count towards capital adequacy, or force the company to divest from assets.