Issue link: http://clhia.uberflip.com/i/220638
Academic literature shows that most policyholders do not want to take responsibility for constantly monitoring their own investments and for making regular investment decisions. In addition, as investors, policyholders suffer from behavioural biases that often cause them to make poor investment choices. Specifically, they are inclined to over-react to short-term price fluctuations and, as a result, end up buying high and selling low. In contrast, insurers' long-term investment philosophy means they can overcome many of these biases. Lower Investment Costs Policyholders can also reduce the cost of investing by outsourcing their investment decisions to insurers. More specifically, the pooling of assets allows a greater scale than would be possible if investments were split into many sub-portfolios thereby reducing administration costs. Finally, by pooling the funds of many investors, insurers give them access to assets in which they would otherwise not be able to invest, such as private placements and other "big ticket" investments like infrastructure projects. Access to Innovative Product Design Insurers' long-term view means they can provide policyholders with a range of options for the investment-related elements of their insurance products: from unit-linked exposure for those able to withstand full-market volatility themselves, through profit-sharing products where the risk is shared (and there is usually a capital protection or a minimum return guarantee), to fully guaranteed annuity-type products where there is no market risk for the policyholder. The combination of benefits described above is what allows insurers to offer long-term products at a cost that is acceptable to both policyholders and to those who provide the capital to back the risks. 4. How the Industry Contributes to the Growth of the Canadian Economy Counter-Cyclical or Stabilizing Role The nature of insurers' business model results in the industry being a key source of stability to the economy. Even in periods of market stress with significant market volatility, insurers receive a continual and steady flow of premiums (see Figure 2). This, together with predictable liability outflows, enables them to hold and continue to buy assets that are temporarily undervalued during a downturn and to sell or avoid assets that are temporarily overvalued during a boom. Insurers' long-term, conservative investment approach, therefore, plays an important countercyclical role in times of market stress. 5