CLHIA-ACCAP

In exchange for premiums, the industry promises to compensate policyholders through a range of products. Insurers must invest the premiums they collect from policyholders to pay claims and benefits on their policies and to cover their operating and capital costs. An insurer's investment strategy is heavily influenced by the profile of its liabilities. The duration of an insurer's liabilities determines the time horizon over which the insurer can invest. In turn, the degree of predictability of timing of the liabilities, which depends on the type of risk insured and the policyholder options built into the contract, determines the required liquidity of investments. Where insurers provide products with guarantees, the guarantee typically sets a minimum investment performance. Insurers will therefore build their investment strategies in such a way that expected returns exceed what is guaranteed. Investment returns represent a core component of insurance products. • Protection products Investment returns allow insurers to charge lower premiums and offset the impact of inflation in cases where the claim amount is not immediately known. • Life products with investment features Investment returns are an integral part of the product itself. • Annuities and other products where the pay-outs to the policyholder are fixed and guaranteed Investment returns available when the customer buys the annuity will, together with life expectancy, dictate the level of annuity that the insurer is able to provide to the customer. • Products with profit-sharing provisions The level of guarantee that can be offered on new policies is directly impacted by the available investments, while the level of profit-sharing on existing policies depends on the actual and prospective performance of investments. Insurers' Investment Profile In order to support its business model, the Canadian life and health insurance industry invests in a number of asset classes that also help to support businesses, governments and the economy. For example, investments include: liquid assets with defined maturity dates, such as government and corporate bonds; liquid assets without a specific maturity date, such as listed equities; as well as illiquid assets, such as infrastructure or private equity investments. 2

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