It looks like the theme of 2023 is already settled. Safety. With the complications of failed banks Silicon Valley Bank, Signature, and First Republic Bank still on the everyone’s mind, for the first time in over a decade, people are wondering if their money is safe.

Banks are supposed to be the safest and most accessible place to store your cash, now 3 of them are listed in receivership to the FDIC. To highlight how unexpected this is, on February 14th, Forbes came out with a list of America’s top 100 banks[1], and Silicon Valley Bank was ranked 20th. Then, on March 10th, a little more than three weeks later, SVB became the second largest bank to fail in US history. That’s 24 days between the two news releases, reflecting two totally different realities.

The events that transpired after their collapse only added to the uncertainty and confusion over what’s going to happen next. Since SVB was in the unique position of having over 90% of their depositors over the $250,000 FDIC coverage limit, some depositors had hundreds of millions of dollars due to take a substantial write-down. That’s before the US Government came to their rescue and bailed out their depositors due to their “systemic risk” to the banking system[2]. Yet when asked if other banks can expect the same bailouts if they should fail, treasury secretary Janet Yellen’s response was interpreted as a resounding ‘maybe’[3]. This raises a very important question; Is your money safe in your bank if it fails? The answer right now is “it depends.” But that’s the least reassuring answer since the 2008 financial crisis.

These bank liquidity issues have yet to reach Canadian banks, but with interest rates as high as they are and the speed of which they got here, its not out of the realm of possibility. And the Bank of Canada is surely preparing for this possibility too.

So, if not a bank, where else should you diversify your money in all this financial uncertainty? The answer is life insurance.

The reason life insurance doesn’t have the same risks as banks, especially in a rising interest rate environment, is that the fixed income portion of a life insurance fund is more likely to be held until maturity. The reason this matters is because there is an inverse relationship between the interest rate of a bond and its price. The higher the interest rate, the lower the price of the bond, and vice-versa. With banks having the advantage of providing instant cash to their deposit holders, they are also the most at risk to sell their bonds at the current price to provide that liquidity. If the price of the bank’s bonds is discounted because of higher interest rates, and enough people want to withdraw their deposits, then the bank can’t fulfill their obligations to give depositors their money in whole. This scenario is exactly what happened to SVB.

However, liquidations of bonds become irrelevant if you hold them until maturity, which is for the most part what insurance companies do. When this is the case, the value of the bond is calculated by the cumulative coupon payments alone.

The benefit of insurance companies holding their fixed income investments until maturity is not an accident. These companies have actuaries, accountants, financial analysts, and experts designing the makeup of their portfolios to minimize financial risk. They have a clear mandate of how their investments must be managed and what percentage of their funds must be invested in which asset class to ensure there is always sufficient cash to pay death claims. This high standard of administration has led to a longevity that few insurance companies around the world can parallel.

Manulife, Canada’s largest life insurance company was founded in 1887. Canada Life was founded in 1847, Sunlife in 1865, Industrial Alliance 1892, and the youngest of the group, Desjardins, was founded in 1900. Those companies are the five largest life insurance companies in the country. All five of them survived 2 world wars, the great depression, 7 pandemics, and all 15 recessions since their founding[4] [5][6]. Life Insurance is tried and tested and mechanically designed to be stable in volatile environments.

Even in the unlikely event of a company failing, every Canadian life insurance company is a mandatory member of the non-profit institution Assuris, which provides each policy holder coverage of $200,000 or 85% of their policy’s death benefit, whichever is larger, and $60,000 or 85% of their policy’s cash value, whichever is larger. Compare that to the CDIC coverage of only $100,000 of each account in the event of a bank failure[7].

In practice, Assuris has worked extremely well compensating policy holders for their losses. Union of Canada Life, the only life insurance company in Canada to fail in the last 25 years, had 22,000 policy holders compensated by Assuris, with 99% of them having their benefits fully protected while the remaining 1% receiving at least 95% of their benefits [8][9].

As the saying goes, you can’t judge future performance based off past results… but the steady stewardship life insurance companies have provided their policy holders for over a century, and the compensation of Assuris in the event of failure, makes investing in life insurance as close to a guarantee of future performance you can get.