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Ernst & Young: Life Insurers Face Critical Challenges

Source: Ernst & Young

Posted on 12 Jan 2010

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The US life insurance industry will likely face an extended period of weak earnings, slow growth and greater regulatory oversight as the economy slowly recovers from the financial crisis, according to Ernst & Young’s Global Insurance Center 2010 U.S. Outlook for the life insurance industry.

Many insurers are confronting these issues with a “back-to-basics” strategy, but that may be shortsighted, according to Doug French, Principal, Financial Services and Insurance & Actuarial Advisory Services Leader at Ernst & Young LLP (US). “That thinking may be helping insurers survive,” French said, “but to become profitable again and achieve growth, insurance executives are going to have to become more innovative and proactive to change the way they conduct business.”

Ernst & Young has identified five key areas for companies to focus on in 2010:

1. Optimize capital in response to ongoing pressures: As debt and equity markets recover value, life insurance companies will need to optimize their deployment of capital in response to continuing challenges. But non-traditional capital markets will take years to recover, which may force companies to alter or eliminate products dependent on these sources. Internally-generated sources of capital will be critical, and with investment yields remaining low, insurers should be exploring ways to strengthen prices for in-force business, such as increasing non-guaranteed fees. Simultaneously, companies need to develop contingency plans that encompass a wider range of extreme events, including liquidity crises, forced liquidation of assets into frozen secondary markets and limitations on transfers of capital within the enterprise.

2. Build more robust risk management capacity with stronger governance and transparency: Risk monitoring should start in business units and be coordinated from the corporate center. Business units and chief risk officers (CROs) should work closely together to maintain processes to identify and escalate emerging risks to executive management and the Board. At the enterprise level, governance needs to focus first on confirming the organization’s risk appetite and risk-taking limits. To fully realize the benefits of risk management, it will be imperative to establish procedures for communicating and understanding risk-adjusted performance results. The chief risk officer will also face increasing demands from regulators and rating agencies on risks assumed and capacity.

3. Focus on core businesses and readdress product and distribution strategies: Insurers will continue withdrawing from non-core businesses, as they conserve capital and reallocate it among those businesses with the best chance of future success. This focus will contribute to industry consolidation, so companies must prepare for the new competitive landscape. Additionally, insurers will seek ways to reduce the risks they face by re-designing and re-pricing products. This presents an opportunity to reach broader markets by developing products that match consumer demands altered by the financial crisis.

4. Operate successfully in a continually changing regulatory environment: Companies will see enhanced regulatory oversight in 2010 with initiatives such as Solvency II which applies new reserve and capital adequacy requirements and US GAAP that is aimed at changing insurance accounting rules. There will be a continuing dialogue of Federal vs. State regulatory oversight and efforts at improving consumer protection will continue. As these developments progress, insurers will need to evaluate the impact of regulatory changes on all aspects of their financials, operations and future growth potential, while keeping abreast of resultant business opportunities.

5. Improve the effectiveness of company infrastructure: Insurers need to examine cost reduction across the entire enterprise, and look for ways to optimize their operations for a low-growth environment in 2010 that could last several years. Companies are examining their people, organization, processes and systems to ensure they are aligned with their strategic objectives. Additionally, insurers will likely look to reduce costs through process re-engineering and headcount reduction, as they have traditionally. But in the current environment, insurers will need to move beyond that to address cost reduction through more robust transformation efforts that will enable them to achieve overall operating efficiency, improve business performance and enhance their ability to be more competitive.

“In 2010, life insurance executives will continue to face a challenging environment and must focus on improving their current strategies and infrastructures to ensure that they are in line with their business goals and objectives,” added Peter R. Porrino, Global Director of Ernst & Young’s Insurance Industry Services. “By focusing on optimizing capital, broadening out risk management capacity and remaining agile in a constantly evolving regulatory environment, life insurance companies will be more prepared for future crises and better positioned once the market rebounds.”

The complete Life Insurance Industry 2010 Outlook report can be found at

About Ernst & Young’s Global Insurance Center

Insurers must increasingly address more complex and converging regulatory issues that challenge their risk management approaches, operations and financial reporting practices. Ernst & Young’s Global Insurance Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.