Chicago — Given the still-bleak economic outlook and impending regulatory reforms, 2009 projects to be a difficult year for U.S. life insurers, according to consulting firm Watson Wyatt.
"Low revenues and a volatile stock market will make 2009 a challenging year for the life insurance industry," says Craig Buck, U.S. head of insurance consulting at Watson Wyatt. "Many companies will focus heavily on transactions, products and pricing, risk management and regulatory reform."
The latest release from Watson Wyatt identifies the following as actions life insurance companies are likely to prioritize in 2009:
Transactions — Mergers and acquisition activity may increase as the current economic environment affords companies an unprecedented opportunity to implement long-term strategic objectives on an accelerated basis. For companies with capital to burn, this could mean significant expansion into new territories, products and markets via one or two key acquisitions. Companies seeking to refocus on core operations will have an opportunity to restructure the business model in short order. In either case, some organizations will undergo major transformations in the coming year.
Products and pricing — The economic crisis has dredged up concerns about the variable annuity market. Variable annuities are often sold with riders that guarantee a minimum level of market performance. The collapse in equity markets has reduced the fee income on these products, and increased the cost of the guarantees provided. The associated increase in capital requirements and the financial stress of some large providers may cast doubts on the short-term performance of these products. Although there could be greater consumer demand for the protection afforded by these guarantees, concern over the short-term stability of equity markets and the financial viability of providers might contribute to a move to fixed products. As the industry becomes more focused on a direct reflection of risk in pricing, there will be more discipline in pricing, including higher prices and additional limitations imposed on these benefits, regardless of the implication for sales.
Risk management — Increased emphasis will be placed on risk management industry-wide. Improvements in techniques and methodologies are almost certain, but the most important change for risk management in 2009 will be greater scrutiny of governance.
Many carriers will have to find the balance between cutting costs and improving risk management capabilities. Additionally, insurers will need to update their management information systems to meet demands of regulators, ratings agencies, investors and managers for more frequent, detailed and accurate updates.
Regulatory reform — The economic catastrophe also has homed in on the need for a more robust reporting and regulatory system. Modifications to proposed changes are expected based on the lessons learned, and the emphasis on adoption and implementation of new methodologies is likely to increase.
"In the year ahead, industry-wide change can be expected," Buck says. "A look inward to repair damages inflicted by the market is inevitable, but the most successful life insurance companies will be those that can adapt to a changing marketplace while staying focused on long-term business strategy."
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