Leaving A Legacy

We all like to be remembered in one way or another. Sometimes we want to be remembered by our community, sometimes by our industry. Sometimes we wish that even just our family would remember us.

How would you like to be remembered by your grandchildren forever?

Before I give you an idea how, let me prove a point.

Get a piece of paper and draw four lines on the top half and draw eight lines on the bottom half.

On the four lines on top, write down the name of your grandparents, first name and last name, on your mother’s side and your father’s side.

Most likely, only half of you would remember the full name of your grandparents.

Now, on the eight lines at the bottom, write down the first name and last name of your eight great-grandparents. Rarely do we meet someone who can write the full name of their great grandparents. Interesting isn’t it?

So how come John D. Rockefeller’s great-great-great-great-great-great-great-grandkids can remember his first and last name and you don’t even remember grandma and grandpa, why? It’s because every year, they get a cheque from John D. Rockefeller.

How would you like to be remembered by your grandkids? Here’s what we can do, it’s very simple.

We have a generous Grandpa who’s has $100,000 of lazy money. He buys a joint lifetime income annuity. The joint annuitant is his 5-year-old Granddaughter. For the rest of his life, he gets $3,864 every year on her birthday.

When Grandpa dies, she continues to get $3,864 on her birthday for the rest of her life. Now let me ask you, if you had a Grandpa or Grandma who gave you $3,864 every birthday for your entire life and never forgot even though they’ve been gone for years. Would you remember their names?

It’s very simple, generous grandpa, $100,000, favourite granddaughter, joint life, $3,864 a year as long as either one of them is alive. Total payout to the granddaughter on her 95th birthday is $351,624.

You may be asking, what about inflation? $3,864 won’t pay be enough to pay for groceries when she’s 65. Ok, we can put in an inflation protection. We can put in a 4% inflation factor on it. Now, her first birthday present goes down to $1,345. But every year, that goes up by 4%. When she’s 20, it goes up to $2,422, when she’s 50, it goes up to $7,856. By the time she’s 65, it’s up to $14,149. Now if granddaughter lives to 100, which is highly likely, she would have been paid a total of $1.2 million over her lifetime.

Here’s how to make it even better. Grandpa takes a portion of the annuity income and buys a 20 pay Whole Life policy on the granddaughter for $100,000. After 20 years, the insurance is paid for and the granddaughter has insurance for the rest of her life where she can put her children as the beneficiary.

Here’s my question, where else can grandpa can put $100,000 and be guaranteed that two generations of his family will never forget his name and out of that $100,000 potentially transfer $1.3 million?

A mutual fund cannot do that, a GIC cannot do that, investing in the stock market cannot do that. That can only be done through an Annuity bought through a life insurance company.

Annuities has gotten a lot of bad press from popular finance authors, but even the Chairman of the Federal Reserve Ben Bernanke has most of his investments in annuities. This is the guy who practically runs the world’s largest economy and more than 50% of his assets are in annuities.

An annuity is a great investment tool that has been ignored by a lot of clients and advisers. Maybe it’s time to look at annuities in your portfolio.

Travel and Inflation

It’s been two months since I wrote something here. I must admit, writing is sometimes hard. Not that I don’t have anything to write about, but more like I thought of something to write while walking/driving/showering but I forget to write it down immediately and when I’m ready to write, I forgot what I was going to write about.

Anyway, I wasn’t able to write anything last month because I was on vacation for three weeks. I went to the Philippines and Hong Kong as we usually do. I’m telling you this because it has something to do with what I am writing about today.

As I usually do whenever I go somewhere, I like to observe everything. I not only try to enjoy the sights and the place, but I always try to look at the town or country from an economics point of view. I know, I’m weird that way.

For my clients who are from the Philippines, here is what I observed.

Philippines

Compared to when I was in the Philippines back around 2009, when Gloria Arroyo was still President. The Philippines today seems calmer with Noynoy Aquino as President. Calmer in a sense that there isn’t much tension in the area of politics like it was back in 2009. Back then, you almost hear that there’s going to be a coup d’etat just around the corner.

While most people will tell you that Noynoy is a know nothing President, in my opinion, a know nothing is better since people can go about their business without interference from the government.

It also seems to me like President Aquino’s promise to curb corruption is somewhat working. I did not hear one siren or “wang wang” in my three weeks there and the authorities did not seem as abusive as they were back when Arroyo was President. Interesting enough, the customs officials at the airport did not even ask for money for coffee or “pang kape” in Filipino parlance. This was in sharp contrast to when Arroyo was President where everyone was asking for “money for coffee”, even the person getting your baggage claim stub.

Noynoy Aquino may not be a smart President, but at least he did create a climate where the government employees would not be so blatantly abusive or corrupt. This is my observation in the short time I was there so it may not be entirely accurate. But it was notable for me.

An interesting thing to note is that the Philippine stock market is actually one of the best performing market since the financial crisis in 2008. It was up compared to every other markets around the world. It’s holding steady now, but it was impressive how good the Philippine market has performed in the last 3 years.

Would it continue doing well going forward? Hard to say. The Philippine stock market is always influenced by “hot money” or money from foreign investors. The reason the Philippine market went up is because foreign investors had nowhere else to go. So they found the Philippines to be the least exposed to the worldwide financial crisis so they all went in there. Good for the Philippine market, but also prone to sudden drops when all these hot money flow out. Which may happen in the near future if these foreign investors keep losing their money in Europe and the US. They will sell everything to keep afloat, even their holdings in the Philippines if they need to.

The biggest problem facing the Philippines right now I believe is inflation and overcrowding. Food and energy prices is really high now. The Philippines has the highest electricity rates in Asia. This is going to dampen the competitiveness of the manufacturing sector.

Overcrowding is another big problem. I’m talking specifically about overcrowding in Downtown Manila or the Binondo area where Chinatown is located. I cannot believe how many malls they have built in that area. These malls are not your regular malls like Richmond Centre or SM. They are of course what we call “Tiangge” or bazaars. It used to be that there was only Tutuban and Ilaya and Divisoria Mall. In addition to that, they now have 168, 268, 368, 568 (they don’t like 4) and so on.

Of course, they sold of an old public school called Jose Abad Santos High School and built in its place mixed commercial and residential building called Cityplace.

I cannot believe how bad traffic is now in Binondo. It’ll take you 30 minutes just to drive one block! And that one block will actually take you 5 minutes if you walk.

Another thing I learned is that they are building the Anchor Sky Suites in the middle of Chinatown. Once built, the 57 storey luxury condominium will the tallest building not only in Binondo, but in any Chinatown around the world outside China.

While that may sound impressive, if you’re from Binondo, you know this is going to be a major headache. It is going to be built along Ongpin Street near T. Alonzo. Everybody knows Ongpin is a one lane street. Can you imagine the traffic? Also, this condominium will have 346 residential units. This is a disaster.

Why do I say it’s a disaster? Let’s look at some facts. The average affluent Filipino-Chinese family will have 3 to 4 family members, then add to that one or two maids. So you are looking at an average of 4 to 6 people per unit. Let’s be conservative and say there’s 4 per unit. Multiply that by 346 you get 1,384 people. Can you imagine the amount of waste, energy and traffic that’s going to be created by that one building alone? If you think the rats in Chinatown are big, they’re about to get bigger. By the way, they’re as big as a cat now.

Hong Kong

I went to Hong Kong for only 3 days, so I can’t really say I know about Hong Kong that much. But here’s what I’ve observed. Hong Kong is getting really expensive now compared to when I was there two years ago. This is due to the increase in tourist from China who are driving up prices in Hong Kong.

In the newspapers, they are talking about the high inflation Hong Kong is experiencing which is hurting a lot of lower income people because of higher food cost. Another thing I read in the newspaper is the importation of gold in Hong Kong increased six-fold compared to last year. The big jump in gold imports is due to buying by the Mainland Chinese who goes to Hong Kong and buy their jewelry and gold there.

What’s interesting to note is that while there was a 6-fold increase in gold imports in Hong Kong, the month of September was one of the worst month for gold when gold went from $1,900 a ounce down to $1,600 an ounce. This shows the disconnect of the futures market with the actual physical market in gold.

Another thing that caught my eye was the jewellery store Chow Tai Fook. For those of you who don’t know, Chow Tai Fook is a major jewelry store chain in Hong Kong. When I went to Hong Kong 2 years ago, I only saw maybe one store in a 5 block area, maybe less. Now, Chow Tai Fook is everywhere, it’s like Starbucks where you can see a store every two blocks (I may be exaggerating here). But I cannot believe how many of these stores I saw in my last trip there. I believe the explosive growth of this company is due to the demand of Mainland Chinese for quality jewelry. In fact, Chow Tai Fook is actually going public. Chow Tai Fook is looking to raise $2.8 billion in it’s IPO and legendary investor George Soros is investing $50 million worth of shares in the IPO.

Hong Kong is still a very dynamic city. There are still a lot of construction going on like it was two years ago. There does seem to be a lot of people from China shopping there compared to two years, ago so this is good for the retailers.

Conclusion

So what does these stories have to do with investing or your portfolio? A lot actually. I’ve learned that investing is not something done in a vacuum. What happens in one country affects another country or an asset in another country.

For example, the increase in food prices in the Hong Kong will translate to an increase in food prices everywhere. As demand grows, prices go up. Supply will go to where it can get the highest price and if there’s a short supply in another country, the prices there will have to go up or get nothing.

The increase in energy prices and overcrowding in the Philippines will affect the country and Asia politically, demographically and socially.

What’s interesting to see is that inflation is growing rampant not just in Canada but in Asia as well. If you think groceries are expensive now, wait till you see your grocery bill next year.

The worldwide inflation is driven by massive printing of currencies by every country. When inflation goes up, the biggest hit will be in commodity prices.

Here are a couple of charts which show what I mean.

As you can see from the charts above, sugar, beef and coffee prices have been going up in the last 5 years. You may see some downward movement in the price from time to time, but in general, the trend has been up.

Take a look at these charts.

These are the charts for gold, silver and oil. Same thing, the trend is up. The trend is up due to demand and inflation. Oil went down during 2008 because of the financial crisis. People expected global demand for oil to decrease. But you can see that it’s now back around $100/barrel again.

What does this all mean? In my opinion, we’re going to see a lot of inflation going forward. There is no way that the massive amount of bailouts and money printing by the major central banks won’t affect the prices we pay. You will hear a lot of opinion about inflation, but the lesson I take here is what happened in Zimbabwe where the government printed massive amounts of money which ended up costing you Z$100 billion to buy 3 eggs.

Think this isn’t going to happen? For our sake, I hope not.

The problem in Europe is cause to worry. The European bond market is very volatile because you don’t know which country is going to report a problem next. Add to that the massive bailout six central banks did yesterday to ease the sovereign debt-crisis in Europe, this means even more money printing. Although they call it a loan, I call it a bailout.

Where should you invest right now? GIC looks safe, but in reality, you’re getting a negative real rate of return on GICs. The highest rate you can get right now in the GIC is 2.65% if you lock in for 5 years. The inflation rate in October 2011 is 2.8961%. So that means, that even if you lock in your money for 5 years, you’re still losing out earning -0.2461% on your investments.

Before I go further, real rate of return to put simply means the rate of return of an investment minus inflation.

So if you invest in a 2 year GIC earning 2.00% and inflation is 2.8961%, you get 2.00 – 2.8961 = -0.8961%. If you’re losing money by saving it, you might as well spend your money right away instead of saving it.

The only solution to this is to find a higher yielding investment doing better than inflation. What is the right investment? There is no single answer for this and we will have to sit down with you one-on-one because everybody has a different investment objective and the answer will have to be tailor made for your individual objective.

US Debt Deal

So the US debt deal has been passed and was presented to Obama a few hours before the deadline which Obama signed. The deal increases the US debt limit immediately by $400B and another $500B by February. This avoids a default by the US government.

Part of the debt deal is to cut the US deficit by at least $2.1 trillion over 10 years. If you divide that, it’s around $200B a year. To put that amount in context, in 2010, the interest alone paid by the US on its debt is $164B. The Department of Defense budget in 2010 is $663.7B. In short, the spending cuts are insignificant.

Here’s the sad part, the budget cut is not really a cut in spending. According to Presidential hopeful Ron Paul, the budget cut is akin to a family “saving” $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.

I know a lot of people are confused on what this US debt crisis is all about and all the rhetoric by both the Republicans and Democrats are making it harder to understand. But here’s what the US debt crisis is in simple terms.

Let’s say a father is making $60,000 a year but the family is spending $100,000 a year. All they have been doing is paying the interest on their credit cards. In the meantime, they keep spending money on cars, gas, luxury items but not on building new businesses. Eventually, their debts grows to a point where they will default on their debt and may have to file for bankruptcy. But at the last minute, the father says, don’t worry, I’ve solved our problem. I just got a new credit card!

That my friends is the US debt situation in a nutshell.

So what does this mean for your investment? Well, if you’re looking at the stock market right now, you’ll know all the world markets are down. Why? The US agreed to cut spending, but they did not raise taxes to increase revenue. So you got the father cutting down on food cost, medical cost, etc. But the mom did not find work to increase income and help pay for the debt. Is it a wonder why the market is reacting badly? How long do you think the US can keep this up? They’re going to reach another debt ceiling in 2012. What then?

The Dow Jones is now below 12,000 again, the same level it was back in June. What’s interesting is, gold is now at its all time high of $1656.60 as of this writing. It was boosted by reports that the Bank of Korea announced that it bought gold for the first time since 1998. Reminding investors of gold’s appeal as a safe haven.

Investment in gold is not similar to investing in real estate or stocks. It pays no rent or dividend, it’s a static investment. When you invest in gold, you are merely protecting the value of your money or buying power. When you see the price of gold going up, it’s not because the cost of gold is rising, it’s because the value of the currency is decreasing and gold basically is a hedge against the decrease in value.

Here’s an example.

If you compare the value of gold to value of other real assets, you’ll see that they’re pretty much the same or better.

In May 2006, the average home price in Vancouver is around $518,716. Gold is at CAD$756.92.40 per oz.

On May 2011, the average home price in Vancouver is around $770,000. Meanwhile, gold is at CAD$1,417.27 per oz.

In currency terms, the cost of buying an average home in Vancouver has increased by 48% from 2006 to 2011. But in gold terms, you can buy an average home for 685 oz of gold in 2006 ($518,716/$756.92) but in 2011, you only need 543 oz of gold ($770,000/$1,417.27) to buy an average home in Vancouver or a drop of 20.7% in gold terms.

Let me clarify that by explaining what I mean by currency terms.

In the circles of gold investing, they differentiate currency and money. When they talk about currency, they talk about the paper currencies we use like the US Dollar or Canadian Dollar. When they talk about money, money is a medium of exchange which can be gold, silver, cows, coffee, etc. Currency is Fiat money or backed by promise of the government to pay. But money is backed by a physical asset like gold or silver.

So when I say in currency terms, it means part of the cost of the increase in housing is due to the devaluation of the currency. So in actual money or gold terms, the cost of housing has actually decreased.

How about in silver terms? Silver price back in May 5, 2006 was at CAD$15.42/oz and at CAD$33.08/oz on May 6, 2011. In 2006, you needed 33,604 oz of silver to buy an average Vancouver home but only needed 23,277 oz of silver in May 2011 which equals to a drop of 30.7% in silver terms.

Note that the May 6, 2011 price I’m accounting for silver is after the margin call requirement which resulted in a 23% in silver prices.

If you account for the price of silver today August 2, 2011 at CAD$39.21. You only need 19,638 oz of silver to buy an average Vancouver home or a 41.5% drop in home prices in silver terms.

So in terms of gold and silver, the prices of homes in Vancouver has actually dropped.

Gold and silver is still considered a speculative investment. In the mutual fund world, normally, when you invest in precious metals funds, you are investing in mining stocks, hence it is considered speculative. However, you may still want to consider investing in these assets either in funds in the near term while the world economy is in a turmoil to protect your buying power. As with any investments, there are of course no guarantee these prices will continue going higher. Eventually, all investments follow a bull and bear cycle and it is impossible to predict when the top or a bottom of a market is going to happen.

As I mentioned in my previous e-mails, after the huge price drop in silver from $47.015 on May 2 to $36.35 on May 5, 2011. The price of silver is now back up to US$40.21 today.

Interesting isn’t it?

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Insurance Trivia

Here’s something else that interesting.

Do you know how much your body part is worth? Here are some examples celebrity insurance policies:

• Shirley MacLaine, who is widely known for her beliefs in reincarnation and extraterrestrial life, owns a $25-million policy protecting her acting fortune against an alien abduction, according to Parade Magazine.
• When the iconic late ’70s band Kiss was at its peak, Gene Simmons had his extra-long tongue—rumoured to be surgically enhanced—insured for $1 million.
• In 2008, the New York Daily News and several other media outlets reported that Welsh pop singer Tom Jones had his chest hair insured for $7 million.
• According to ABC News, country star Dolly Parton has insured her 42-inch bust for $600,000.
• Aquafresh insures Ugly Betty’s America Ferrera’s teeth for $10 million.
• Several media sources have reported that the Rolling Stones’ guitarist, Keith Richards, has insured the middle finger on his left hand for $1.6 million.

(source Elliott Special Risk LP)

The Cost Of Education

>I’ve been talking to a lot of my clients about education savings lately that I thought I should write some information about the cost of education.

First let’s look at education cost.

How much does it cost?

The average cost of University education in BC is around $4,300 a year. Here’s a list of average cost of Universities around BC for 2010/2011 from the Province of British Columbia website.

I also found this calculator from the University of British Columbia to estimate the cost of going to UBC.

Including books and student fees, it currently cost around $7,200 a year for a science major. It’s cheaper as a Fine Arts major at $6,500. Engineering major is around $8,500. But a law major would need $13,100 a year and to be a doctor will cost almost $20,000 a year.

Luckily for British Columbians, tuition fee increases has been limited to just 2% per year which is pretty manageable for most families. Whether this trend continues in the future, we’ll have to wait and see.

On average, a four year education would cost a total of $17,200 including books but not including any other miscellaneous fees like travel, personal expenses, board and lodging (if living away from home).

So depending on what course your child will take and which University they’re going to, we can assume that your child will need between $20,000 to $50,000 for a four year course.

So how will the child pay for his or her University? There’s several options:

1. The parents can pay for it.
2. The child can work part time to help pay for part or all of the cost
3. They can get a student loan, or
4. The parents can save money in an RESP.

There’s not much to discuss on the first two options, so let’s go to the third option, getting a student loan.

Student Loans

If the student qualifies for a student loan, according to the Canada Student Loan Act, they won’t have to repay the loan while they are a full time student. Once they cease to be a full time student, either by graduating or just dropping out of college, they have to start repaying the loan before the last day of the 7th month after ceasing to be a full time student.

For the months between graduating and the 7th month, interest will be applied to the student loan but the student is not required to pay yet. They will be required to start paying off the loan on the last day of the 7th month of graduating. So there are accrued interest in the loan for the first six months from graduating or ceasing to be a full time student.

I know it’s a little hard to understand, but let’s just put it this way. If the child graduates on June 15, 2011. From July 2011 to December 2011, interest will be charged on the loan but the child is not required to pay for it. However, the child is required to start paying off the student loan before the end of January 31, 2012.

Canada Student Loans carries a maximum fixed interest rate of the prime rate + 5% or a maximum floating rate of the prime rate + 2.5%. Provincial student loans have different interest rates varying from province to province.

Here’s a link explaining how to pay off a student loan.

RESP

The other option is to set up an RESP or a Registered Education Savings Plan for the child.

For example, the parents can setup an RESP and contribute money into the plan. They will then be eligible for the following:

Canada Education Savings Grant (CESG)

• A grant that equals 20% of the first $2,500 of their annual contribution up to a maximum of $500 a year.
• Grant is given until the end of the calendar year the child turns 17.
• Lifetime amount of $7,200.

Canada Learning Bond (CLB)

• For parents who’s child is born after December 31, 2003 and the parents qualify for the National Child Benefit Supplement
• One time contribution of $500 to an eligible RESP.
• Additional $100 for each year of eligibility until the child turns 15.
• Up to $2,000 in total.

The parents may qualify for additional CESG depending on their income.

Those living in Alberta and Quebec may qualify for additional benefits.

Basically, everyone qualifies for the Basic CESG of 20% on the first $2,500 of annual contributions. The other grants are based on when the child is born and income of the parents.

So if your child is going to University in the next 5 years, the aim is to save between $20,000 to $50,000 to cover a child’s education.

There are special rules to follow when you want to start an RESP for a child that is between 15 to 17 years old.

In order to continue receiving the Canada Education Savings Grant after age 15, certain contributions must have been made to the RESP (and not withdrawn) by December 31 of the calendar year in which your child turns 15.

They are:

1. Total contributions of at least $2,000, or
2. Contributions of at least $100 a year or more in any 4 previous years.

Let’s say your child turns 15 on July 2011. That means by December 31, 2011, you must have either contributed at least $2,000 in total to your child’s RESPs, or you must have put in at least $100 annually in any of 4 previous years (they don’t have to be consecutive years).

In Summary

The cost of education in BC at this time is manageable. The child can work part-time, get a student loan or the parents can contribute into an RESP.

Some parents who can’t save for the full cost of education either because of their income or don’t have enough time to save because they have older children may still want to contribute as much as they can into an RESP. The 20% grant and helping your child pay for their University education is the best return on investment you can get.

Why Are My Insurance Rates Going Up? May 2011 Newsletter

>A question I’ve been asked a lot lately is why are their home insurance rates going up.

Home insurance rates are based on several factors. The factors that affect your rates directly are:

1. Location of your home
2. Cost to rebuild in your area
3. Materials used
4. House features
5. Dollar amount of coverage

Your location is usually the first place companies will use to determine the cost of your insurance premiums. If you live in an area where there has been a lot of claims, then your premiums will be higher compared to a similar home two blocks away from you if there has been no claims in that neighborhood.

If you live in an are where the cost to rebuild is higher like on the islands with limited access or materials has to be shipped by ferry. Then the cost to rebuild is higher than one in the city.

If your home uses high end materials like hardwood floors, solid oak wood cabinets, etc. Then naturally, the cost of materials to rebuild your home is more expensive than those which uses vinyl carpet or laminate floors.

Having features like stained glass windows, skylights, two kitchens, a huge bathroom will bump up the cost to rebuild your home

All these factors determine what is called the replacement cost for the building or the house structure.

With the cost of raw materials going up as well as gas prices. It is costing more and more to insure your home and keep the insurance companies profitable in the event of a claim.

You may be asking yourself, I live in a strata condo/townhouse. I’m only insuring my contents, so why is my insurance premiums still going up?

There are other factors that affect insurance premiums other than those mentioned above. These are determined by the insurance companies and are their internal basis for factoring thee premiums they charge. These are:

1. Inflation
2. Replacement Cost
3. Capital reserve requirements
4. Investment returns

Inflation rates determine if your coverage increases a little or a lot. Every year, your insurance coverage goes up by a few percent called the “inflation factor” or “inflation index”. Just like your groceries, the cost of your groceries goes up every year by a few percent.

For example. if you are insuring your personal property (contents) for $50,000. It is logical to assume that next year, the cost to replace your property is going to be higher than $50,000. It may cost $50,200. Since your insurance coverage is higher, your insurance premiums also go up.

“But my stuff is old, why are the insurance companies increasing my coverage?” you may be asking. The reason is, when the insurance company replaces your stuff in the event of a claim. They don’t buy you used stuff. They buy you brand new stuff like furnitures, TV, clothes, couch, etc.

Since it may be 10 years after your first insure before you have a claim. Naturally, prices 10 years from now are going to be higher than today. The only properties that usually go down in prices are TVs. But 10 years from now, they will no longer have the same model TV that you currently have. So the company has to replace it with a newer TV. But they will replace it with the same brand, size and the model closes to what you had before you had the claim. That’s why your insurance coverage goes up every year.

One thing you have to remember though, the percentage increase in your insurance coverage is not proportional to the increase in your insurance premiums because there are other factors affecting the premiums.

The company’s capital reserve requirements can affect the rates you pay as well. Insurance companies are required by regulators to prove they have enough capital reserve to pay claims. Meaning, their assets must exceed their liabilities (risks insured). If they experience a year or two with a lot of claims or they have one really large claim, those claims may eat up their capital reserve which in turns reduces their assets.

When their assets are reduced, they have to bring it back up to the reserve requirements. This is similar to your condo corporation’s reserve funds. If your condo corporation’s fund are low, expect your strata/condo fees to go up to build up the reserve.

Insurance companies also invest the premiums they collect until a claim is paid. Because these premiums are expected to be paid out, the insurance companies cannot invest in high risk investments like stocks. They are limited to liquid investments like bonds. Because we are in such a low interest rate environment, insurance companies have a hard time making money from these investments. This low return makes it harder for companies to maintain their reserve requirements so they have to make this up by increasing their premiums.

Normally, a year or two of low interest rates won’t affect your premiums by much. But we’ve had low interest for over 2 years now and the insurance companies don’t expect the interest rates to go up by much in the near future. This in turn translated to an increase of between 10 to 20% in your insurance premiums.