Washington — The financial reporting environment in the life insurance industry is in the midst of significant change, driven by the movements toward an international reporting standard and toward principles-based approaches to setting reserves and capital in the United States, according to Watson Wyatt Worldwide, an Arlington, Va.-based global consulting firm. In addition, companies are experiencing a wide range of information-related demands from regulators, rating agencies and shareholders.

Life insurance companies will be under growing pressure to enhance their financial management system capabilities as they face changing financial reporting requirements and more extensive risk management challenges in 2008, according to the firm.

"Life insurance companies are facing a host of pressures, and many are finding their current financial modeling software may soon be pushed to the limit," says Craig Buck, leader of the U.S. life actuarial practice in Watson Wyatt's insurance and financial services consulting group. "Increasingly, there is a competitive advantage for executives who are able to undertake a sophisticated analysis of their company's performance and explain it to stakeholders. This ability also can help increase risk-adjusted returns and identify trapped capital that has been dragging down performance. Many legacy systems are not able to provide this kind of insight."

In the actuarial world, process inefficiencies, increased business complexity, regulatory demands and data volume are leaving little time for crucial analysis, driving a growing trend toward automation, according to a roundtable hosted by The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP, (E&Y) New York.

E&Y's fourth annual Actuarial Transformation Roundtable focused on business intelligence (BI) strategies for actuaries coping with new challenges surrounding financial reporting, planning, forecasting and risk management.

Unlike last year's event that focused on business and IT alignment, at this year's event, senior actuaries and IT executives from leading insurance organizations shared attitudes and progress with respect to enhancing current methodologies through the use of technology. A survey conducted at the event revealed that three-quarters (75%) of actuarial participants spend 20% or less of their time on validation, reporting, analysis and explanation of results.

"Understanding and explaining results is fundamental for insurers, and it will be increasingly difficult to do so as companies get larger and the reporting requirements grow more complex," explains Steve Goren, leader of the E&Y's IAAS Actuarial Transformation practice. "The bar has been raised, and actuaries are beginning to recognize the potential role business intelligence can play in their future success."

There was broad agreement among participants at the Roundtable that management expects more transparency and accuracy in a post-Sarbanes-Oxley world. Acknowledging that the goals are clear, they also agreed that current processes and systems do not offer the necessary support to achieve these objectives. Pointing to the sheer volume of data and accelerated close times, there was broad consensus that little time is left for analysis. As a result, the actuarial team is frequently left unable to answer crucial management questions in a timely manner.

Agreeing that current daily challenges are already stretching their departments to the limit, the group also discussed the added complexity being created by new product guarantees and options. Of even greater concern were the new requirements on the horizon, including the move toward fair value and principles-based reporting. Driven by principles-based approaches to reserves and capital in the United States, as well as IFRS and Solvency II in Europe, attendees acknowledged tha the shift from deterministic to stochastic methods is underway. Many questioned their ability to succeed in this new environment without overhauling current actuarial systems and processes.

At the same time regulations are changing, risk measurement and management demands are becoming more complex, according to Watson Wyatt. Some companies may find that their existing systems are a source of risk that needs attention. But meeting these demands requires more than investment in technology—companies will need to invest in training their staff to fulfill the new reporting requirements and use the latest methodologies. All of this means higher costs.

"To be successful in this environment, companies need to deal in high volumes," Watson Wyatt's Buck says. "The industry is searching for growth. One likely result of this will be more consolidation among life insurers in 2008. Many large companies are in a strong financial position and will continue to seek growth opportunities through acquisitions. Especially considering the weakness of the U.S. dollar, it would not be surprising to see more foreign insurers exploring the U.S. market."

Sources: Watson Wyatt Worldwide and Ernst & Young LLP

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