THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 322

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PA R T I I I

Financial Institutions
as the traditional whole life insurance) and temporary life insurance (such as
term insurance). Permanent life insurance policies have a constant premium
throughout the life of the policy. In the early years of the policy, the size of this
premium exceeds the amount needed to insure against death because the probability of death is low. Thus the policy builds up a cash value in its early years, but
in later years the cash value declines because the constant premium falls below
the amount needed to insure against death, the probability of which is now higher.
The policyholder can borrow against the cash value of the permanent life policy
or can claim it by cancelling the policy. For this reason, permanent insurance is
also called endowment insurance.
Term insurance, by contrast, has a premium that is matched every year to the
amount needed to insure against death during the period of the term (such as one
year or five years). As a result, term policies have premiums that rise over time as
the probability of death rises (or level premiums with a decline in the amount of
death benefits). Term policies have no cash value and thus, in contrast to permanent life policies, provide insurance only, with no savings aspect.
Beginning in the mid-1970s, life insurance companies began to restructure their
business to become managers of assets for pension funds. Now more than half of
the assets managed by life insurance companies are for pension funds and not for
life insurance. Insurance companies have also begun to sell investment vehicles
for retirement such as annuities, arrangements whereby the customer pays an
annual premium in exchange for a future stream of annual payments beginning at
a set age, say 65, and continuing until death.

Property and
Casualty
Insurance

There are 196 property and casualty (P&C) or general insurance companies in
Canada (see Table 12-1), and about 40% of the industry, measured by assets held, is
foreign-controlled. Most property and casualty insurance companies in Canada are
federally registered and subject to regulation by OSFI and the Property and Casualty
Insurance Compensation Corporation (PACICC). PACICC was set up in 1988 and performs the same role for property and casualty companies as Assuris does for life
insurance companies. Some lines of P&C insurance, for example auto insurance, are
also subject to provincial laws and regulations.
Property insurance covers losses of real property and casualty insurance protects
against legal liability exposures. Although property and casualty insurance companies
have seen a slight increase in their share of total financial intermediary assets since
1960, in recent years they have not fared well, and insurance rates have skyrocketed.
With the high interest rates in the 1970s, insurance companies had high investment
income that enabled them to keep insurance rates low. Since then, however,
investment income has fallen with the decline in interest rates, while the growth
in lawsuits involving property and casualty insurance and the explosion in
amounts awarded in such cases have produced substantial losses for companies.
To return to profitability, insurance companies have raised their rates dramatically
sometimes doubling or even tripling premiums and have refused to provide coverage
for some people. They have also campaigned actively for limits on insurance payouts,
particularly for medical malpractice. In the search for profits, insurance companies are
also branching out into uncharted territory by insuring the payment of interest on corporate bonds and mortgage-backed securities. One worry is that the insurance companies may be taking on excessive risk in order to boost their profits. One result of the
concern about the health of the property and casualty insurance industry is that insurance regulators have proposed new rules that would impose capital requirements on
these companies based on the riskiness of their assets and operations.