Perspectives: Canada Sidesteps the Worst of the Financial Crisis

August 30, 2010 BestWire Services Email Print Free Newsletter

Financial institutions in developed nations worldwide reeled from the effects of the financial crisis that began in September 2008. But Canada and its life insurers escaped the worst of the crisis.

Canada's financial-services regulatory framework and positive relationships between regulators and companies all played a role in insulating life insurers from the adverse effects of the recession, according to Frank Swedlove, president of the Canadian Life and Health Insurance Association.

But the nature of the Canadian economy mattered, too.

"The Canadian economy itself has proven more stalwart through the financial crisis, in part because it entered the recession in better shape fiscally, with less debt-to-gross domestic product and smaller deficits," said Dean Connor, chief operating officer of Sun Life Financial.

A primary reason for the Canada's economic strength was that the housing bubble--the centerpiece of the United States' recession--was not as big an issue in Canada, Connor said. "We have shorter-term mortgages, and mortgage interest is not tax-deductible, so you didn't see the kind of leverage in the housing market here that we did in the U.S.," he said. "And although the economy in Canada slowed last year, it has rebounded faster and is in pretty good shape."

To judge the housing markets' impact on insurers' portfolios in Canada and the United States, one need look no further than Sun Life's Canadian and American businesses. Because of mortgage-backed securities in the portfolio of Sun Life's U.S. subsidiary, the parent company in Canada had to make capital contributions to it the past two years, reducing financial flexibility for the group, according to July's A.M. Best Credit Report for Sun Life Assurance Company of Canada (U.S.).

Connor said commercial and residential mortgage-backed securities have been common and important investments for U.S. life companies, including Sun Life. Canadian life companies were invested in real estate and mortgages to a lesser extent, so their credit experience was much better, he said.

Stephen Irwin, vice president in the life/health ratings division of A.M. Best, said that the subprime and Alt-A types of mortgage securities so prevalent in the United States did not exist to the same extent in Canada because of better mortgage underwriting standards. Meanwhile, mortgage underwriting in Canada remained disciplined, said Richard McMillan, managing senior financial analyst at A.M. Best. And a few years ago, in reaction to weakening conditions in the housing market, the Canadian government refused to provide government insurance on longer amortizing loans.

"You could say there was some restraint by the regulators that helped to keep the market more reasonable than it was in the U.S.," he said.

As a result, Canada for the most part avoided a run-up in property values that occurred in many parts of the United States, McMillan said.

Other factors were also at play. One is the role played by the Office of the Superintendent of Financial Institutions, Canada's primary regulator and supervisor of federally regulated deposit-taking institutions, insurance companies and federally regulated private pension plans. Connor said OSFI oversees the operations of Canadian life insurers wherever they do business.