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Letter to the Editor (January 01, 2004)


January 1, 2004   by Canadian Underwriter


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In his Letter to the Editor (CU’s November 2003 issue, page 49) broker Neil Whetham criticizes writer Craig Harris for comments made in Harris’ August 2003 article “Building Boom Insurance Bust.”

In particular, Whetham singles out Harris’ closing comments that, “Some repeat the familiar refrain that insurers are [increasing rates] simply trying to recoup recent losses suffered in the stock markets. This argument would hold more water if Canadian insurers were big investors in equities, which they are not. An industry portfolio with about three-quarters of its holdings in bonds is taking its hits mainly from low interest rates.”

Whethan confidently remarks, “I think Mr. Harris should take another look at the relationship between bond pricing and interest rates and then try to contain his own laughter. Bond pricing and interest rates are inversely related. And if the insurance industry is in fact heavily into the bond markets of the world then the argument [about low interest rates] backfires on the insurers. If you are investing in bonds now you are in fact making money not losing money!”

Whethan should know that there is a difference between bond yields (the interest payments made to bond holders by bond issuers) and bond prices (what it costs to buy a bond). In his article, Harris is speaking about the former, which indeed accounts for the lion’s share of the p&c industry’s investment returns. In fact, nowhere in his article does Harris mention bond prices.

Record low interest rates have hit bond returns across the globe the last few years. Pension plan performance and p&c industry investment income are just two areas that have been hit hard. This is widely known and completely accepted by virtually every economist, finance expert and investment guru on the face of the earth.

Whethan is correct when he says that bond prices and interest rates have an inverse relationship: when yield goes down, the price of the bond goes up, and vice versa. But high bond prices are only of value to p&c insurers if a bond is sold and a gain is realized, which is not all that common in the Canadian p&c segment (p&c insurers normally hold bonds to maturity).

Incidentally, the accusation that insurance companies are raising rates to make up for equity market losses fades when one looks at A.M. Best Company data, which clearly indicates that insurance industry bond and equity holdings have remained reasonably steady for the last five calendar years. The only major jump can be seen in the $4.63 billion that was added in bonds and debentures over the period.

Yours Truly,

Glenn McGillivray

Swiss Re Canada