Life Industry Preps for Accounting and Regulatory Changes


Given the reform-minded culture and mindset now pervading Washington, changes are on the horizon for insurers. The life insurance industry, already adversely affected by the economic crisis among other challenges, also is facing impending accounting and regulatory changes that will heap greater operational risk onto an already less-than-ideal situation, according to a new study by Conning Research and Consulting.

Accounting regimes in the United States and European Union are converging, the report says, and moving to a principles-based structure. At the same time, insurance regulations, including capital solvency testing, are becoming more risk-focused and will include sophisticated stochastic modeling.

“The transition to a new accounting regime will present a large operational risk to life insurance companies,” says Conning’s Director of Research Stephan Christiansen. “Insurers must prepare for the coming changes so that they not only comply with the new accounting regime, but also gain a strategic advantage from the transition and resulting structure. For those companies that successfully implement the new accounting regime through a comprehensive ERM framework, management will have the opportunity to take a broader view of risks, and take appropriate actions to help control the risks. The resulting measurements can be more risk-sensitive, leading to better business planning and a more efficient use of capital.”
The study, “Upcoming Life Industry Regulatory and Accounting Changes: Implementing Through ERM,” goes on to note that insurance companies can use the forthcoming accounting and regulatory modifications as a catalyst to create a comprehensive ERM management framework that will help them to prosper in a financial environment that will be fundamentally different because of the credit crisis.
“U.S. and European Union life insurance accounting and regulations are undergoing a transformation,” says Terence Martin, VP, Insurance Research, Conning Research. “The final form of the resulting accounting regimes are not yet finalized, and the current credit crisis may well affect that final form. However, most are confident that it will be principles-based. The move to a principles-based regime will increase the complexity of many accounting and regulatory functions. Some stakeholders have voiced concerns about that complexity, and there are clearly implementation challenges.”

Last month, Conning investigated the trends and challenges occupying the attention of life insurers’ senior management for the next two to three years due to the impact of the financial crisis.

“Insurers will be dealing with the challenges of 2009 and beyond in ways specific to their individual situations,” Martin told INN. “Of course, there will be the issues of recapitalization and expense control, but in addition, we can expect changes in product mix and definition, and an increased emphasis on risk measurement and control.

“Consolidation will likely be an important driver in the near future as well,” he added, “as stronger companies seize the opportunities that present themselves during these tumultuous times. The industry is already scale driven, and we will see stronger companies gaining market share and benefiting from their focus on asset management efficiency and expense control.”

For reprint and licensing requests for this article, click here.