The US life insurance industry may face an extended period of weak earnings, slow growth and greater regulatory oversight, according to Ernst & Young’s Global Insurance Center 2010 U.S. Outlook for the life insurance industry.
Instead of relying on a “back-to-basics” strategy in 2010, insurers should focus on innovating in five key areas, said Doug French, principal, Financial Services and Insurance & Actuarial Advisory Services Leader at Ernst & Young LLP. Those areas are:
1. Optimize capital in response to ongoing pressures. Non-traditional capital markets will take years to recover, forcing companies to alter or eliminate products dependent on these sources. With low investment yields, insurers should strengthen prices for in-force business, such as increasing non-guaranteed fees. Companies should plan for 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. Top executives need to confirm the organization’s risk appetite and risk-taking limits. Establish procedures for communicating 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 the most viable businesses. As a result, the industry will consolidate. Insurers will reduce risks by re-designing and re-pricing products.
4. Operate successfully in a continually changing regulatory environment. Companies will see initiatives like Solvency II, which applies new reserve and capital adequacy requirements, and US GAAP, which may change insurance accounting rules. There will be a continuing dialogue of Federal vs. State regulatory oversight. Efforts at improving consumer protection will continue.
5. Improve the effectiveness of company infrastructure. Insurers need to reduce costs through process re-engineering and headcount reduction and prepare for a lengthy low-growth environment.
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