Interest in Insolvency

Canadian property and casualty insurers are conservative investors with many firms further reducing investments in equities and increasing their share of government bonds in recent years. This reduces exposure to equity market volatility and risk, but it also increases exposure to interest rate risk. Interest rate risk will be significant if there is increased volatility in interest rates; historically, insurer insolvency rate is at least partially correlated with interest rates, particularly volatility in interest rates. Although it is unlikely interest rate volatility is the only or primary cause of failure, the high correlation coefficient does suggest that greater rate volatility increases the probability of insolvency for vulnerable companies. Interest rates can also adversely affect the present value of insurer liabilities.