Ernst & Young’s 2009 Insurance Outlook for the US Life Insurance market initially notes that US life insurers will be dealing with the multiple lingering after-effects of the global financial crisis and deepening recession for some time to come.
This Outlook discusses these key considerations for US life insurers in 2009:
• Shift product and investment focus to align with risk;
• Retool risk modeling and measurement;
• Anticipate changes in the regulatory environment;
• Expect changes in accounting requirements;
• Address increasing expense imperatives; and
• Capitalize on the retirement income market.
The implications of the current economic crisis may take months or perhaps years, to evaluate fully. Once the immediate crisis passes, insurers will have to adjust to an environment that has fundamentally changed -- both for them and for the consumer.
Insurers face balance-sheet challenges after enjoying several years of very strong capital adequacy ratios. The unrealized capital losses of life insurers will not be evenly distributed across the industry, and competitive differentiation in capital strength and rating agency responses will emerge. Capital from external sources will be more costly and less dependably available than in the past, whether through debt or equity issuance. Some consolidation is likely, and capital that is generated through internal operating performance will be critical for stability, to fund growth and to take advantage of emerging competitive opportunities.
In the year ahead, life companies will need to incorporate risk management lessons learned in 2008 into their risk management processes. A major lesson that has been learned is that risk models generally do not provide reliable answers to how much remote-event risk is being borne by an organization. When it comes to modeling priorities, line managers and corporate functions will have increasing responsibility to ensure that lessons learned are incorporated into models. But the effort to improve models will fall flat without supervision by managers who are accountable and knowledgeable about real world trends and influences.
It is almost certain that the industry will face increased regulation as an outcome of the current crisis in the financial services industry. The case for regulatory convergence can be strongly made in the life industry, where geography matters little in product design or consumer preference. The strongest argument for state control of life insurance regulation centers on consumer protection. Federal regulation could alter the competitive landscape of the life insurance industry and may result in banking and insurance converging more than has been seen so far.
Accounting issues will be critical in 2009 as companies prepare for the conversion to a market-consistent framework for financial reporting. As companies plan for the upcoming changes, the definition of the market consistent framework itself may undergo changes as the impact of the financial crisis, and the role played by mark-to-market accounting of thinly-traded instruments, is better understood. Company managements must at least keep up with their peers in adopting systems and information capabilities to respond to these changes as they unfold.
Given the current economic turmoil, both assets and net premiums are likely to fall in real terms in 2009, forcing insurers to significantly reduce expenses to maintain their competitiveness. While insurers have traditionally outsourced non-core processes, in 2009 they will be pressed to reduce expenses associated with core functions as well. An alternate implication of pressures for expense reduction may be to seek scale through increased consolidation and Merger and Acquisition activity.
The impact of the 2008 financial crisis on individual 401(k) plans, IRAs and other retirement vehicles may have a lasting effect on consumer attitudes to retirement savings and investing. Insurance carriers, with their capabilities in combining insurance and investment expertise and scale, are positioned to develop products to meet these changing needs of consumers planning for retirement. By refining their use of underwriting and risk segmentation, companies can create competitive products that help consumers manage the retirement income and longevity risks they face.