Challenges Ahead for Life Insurers in '09

The global financial crisis will bring major changes to the U.S. life insurance industry, impacting the balance sheets, operating performance and competitive positioning of many of these organizations, according to Ernst & Young's Global Insurance Center U.S. 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 U.S. 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:

1. 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 U.S. life industry has realized and unrealized capital losses of $36.5 billion from bonds and preferred and common stocks through the third quarter, representing a 12% drop in surplus, according to Ernst & Young and Conning Research & 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.

2. Retool risk modeling 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 modeling 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.

3. 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. U.S. 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.

4. 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.

5. 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.

6. Capitalize on the retirement income market: By the end of 2007, more than half of the $17.6 trillion in U.S. 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 organization to better serve their clients in what is expected to continue to be a challenging economic environment," said French.

The complete Life Insurance Industry 2009 Outlook report can be found at www.ey.com/insurance.