Ernst & Young
predict:
Challenges and opportunities for life insurers
The global financial crisis will bring major changes to the US life
insurance industry, impact the balance sheets, operating performance and
competitive positioning of many of these organisations, according to
Ernst & Young's Global Insurance Center US Outlook for the life
insurance industry. But for some insurers, opportunities will emerge as
well.
Companies must adapt to this new economic climate and work
strategically to identify trends to grow and remain competitive,
suggests Doug French, Principal, Ernst & Young's Insurance and Actuarial
Advisory Services.
The global economic crisis has caused world-wide setbacks, and as a
result many companies in 2009 will focus on developing new products and
services to combat costs to run their businesses more efficiently,
French says. The US life insurance industry is well positioned to tackle
these issues and move forward from this crisis by taking the lessons
learned to develop opportunities and become a true partner to their
customers. Ernst & Young has identified six significant challenges that
the life insurance sector must address in 2009:
Shift product and investment focus to align with risk: Consumers have
responded to the crisis by changing their risk appetites and moving away
from variable products to fixed and universal life products that are
perceived as more secure. Simultaneously, insurers face balance sheet
challenges after years of stability. The US life industry has realised
and unrealised capital losses of $36.5 billion from bonds and preferred
and common stocks through the third quarter, representing a 12 per cent
drop in surplus, according to Ernst & Young and Conning Research and
Consulting. Insurers agile enough to shift their focus to
guaranteed-return products and create fixed returns may gain short-term
advantages, while those companies able to squeeze performance from
general account investments will likely gain longer term advantages.
Retool risk modelling and measurement: In 2009, life insurance
companies will incorporate risk management lessons learned into their
existing enterprise risk management processes to stay ahead of their
competition. In terms of modelling priorities, line managers and
corporate functions will have increasing responsibility to ensure that
lessons learned are incorporated into the models. Companies that develop
a holistic approach to ERM will be better equipped to maintain liquidity
under future stress scenarios.
Anticipate changes in the regulatory environment: As a result of the
financial crisis, one thing is certain the industry will face increased
regulation. The regulations will likely be more intrusive, including
ongoing monitoring of activities and financial performance. Life
insurers will benefit from regulatory convergence because geography
matters little in product design or consumer preferences. US life
insurers with international offices would benefit from dealing with a
single federal regulator, particularly if the regulations are harmonized
with Solvency II, which is being developed in the EU.
Expect changes in accounting requirements: As the industry prepares
for new regulatory standards for financial reporting, life insurance
companies must understand these accounting issues. There are several
frameworks with planned implementations by 2012, including IFRS 4 Phase
II and Solvency II. The companies poised with the appropriate
infrastructure will hold an advantage.
Address increasing expense imperatives: Assets and net premiums are
expected to fall in real terms in 2009. As a result, insurers will look
to significantly reduce expenses to remain competitive. Insurers may
look to outsource core functions of their business, such as actuarial
support, billing and collection, and claims adjudication to further
decrease spending. However, it will be important for insurers to manage
these sourcing relationships vigilantly because the insurer, not the
outsourcing vendor, ultimately holds the responsibility to maintain
high-quality services. Companies may also need to seek scale through
increased consolidation and M&A activity. For life insurers to be
successful following a merger or acquisition, it will be crucial to
manage the integration of business functions and cultures of the
companies involved.
Capitalize on the retirement income market: By the end of 2007, more
than half of the $17.6 trillion in US retirement accumulations was in
defined contribution plans and IRAs, which reflects the long-term
decline of defined benefit programs. As the retirement landscape
changes, consumers and employers are seeking innovative alternatives to
fund future income needs. This provides great opportunities for US life
insurers in the retirement income space.
Life insurance executives must remain ahead of their competition by
staying current on trends in product innovation, understanding the
regulatory environment and implementing a solid risk management system
within their organisation to better serve their clients in what is
expected to continue to be a challenging economic environment, said
French. |