CLHIA-ACCAP

more risky asset classes, such as private equity, in search of the required yield to support their longer-term liabilities. A sustained flattening of the yield curve, as we have recently experienced, may also incent government debt issuance towards the short-term. This reduces the relative supply of longterm debt in the market and has important implications for long-term investors, such as insurers, that rely on a healthy supply of long-dated bonds to match their long-term liabilities. Increasing the availability of quality long-term investments that can match the duration of the underlying insurance contracts will serve to reduce the extent of the volatility in insurers' financial reporting. This enables insurers to optimize their cost of capital and provide protection at a reasonable cost to Canadians. Accounting Rules Accounting standards play an important role in standardizing how insurers prepare and present their business income, expenses and financial position. These standards can also be a significant driver of the types of products that insurers offer to the market, the cost of those products and the investment choices to support those products. As outlined above, insurers strive to match the term of their liabilities to the term of their assets as a tool to reduce the investment risk of offering long-term products. It is important that accounting standards recognize the vital connection that exists in the overall asset-liability management strategy and practices of insurers. If they do not, the ensuing earnings and capital volatility will negatively impact the ability of insurers to offer long-term products to Canadians at a reasonable cost. In this context, it is important to note that the proposed International Financial Reporting Standard (IFRS) for insurance contracts would likely result in increased volatility, as it does not generally take into account this critical asset-liability link of insurers' business model. Accounting rules are also critically important as financial reporting drives both prudential regulation and taxation rules for Canadian insurers. Prudential Regulation The prudential regulation of insurers aims to ensure that they hold enough capital to cover the risks they face and that they act in the interests of their policyholders. It is important that in setting prudential capital requirements, policy makers recognize and distinguish between the range of products in the marketplace and their inherent risks, the investments that support 10

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