Chief financial officers at North American life insurance companies expect to make only moderate changes to staffing levels despite being confronted with significant regulatory changes, according to a survey of chief financial officers by Towers Watson, a global professional services company. 

The survey addressed requirements for the International Financial Reporting Standards (IFRS) 4 Phase 2; National Association of Insurance Commissioners (NAIC) Own Risk and Solvency Assessment (ORSA); NAIC Valuation Manual (VM) 20; Actuarial Guideline (AG) 38, revisions for 8D and 8E; and Statement of Statutory Accounting Principles (SSAP) 102/92, as the potential impact of the regulations on operations. Companies that write universal life with secondary guarantees will feel the greatest impact of these new regulations, Towers Watson said.

Half of survey participants said they expect major changes to the product design and pricing for their universal life product with secondary guarantees; 17 percent will stop selling universal life altogether or significantly curtail its sale, while 33 percent will make changes on product design, pricing or both; 15 percent will implement major changes to their annuity products; and 55 percent are considering design changes to their pension and 64 percent to retiree medical and life plans.

“NAIC regulators have maintained that the design for many of these products does not sufficiently reflect the reserves they warrant,” said Jack Gibson, managing director, life insurance consulting for Towers Watson. “The complexity of these new life insurance regulatory requirements makes it imperative that insurers understand exactly how these changes will alter everything in their business – from supplementary reporting to capital financing for products such as universal life with secondary guarantees and term insurance.”

However, CFOs expect to make only moderate changes to current staffing levels, despite the fact that only 13 percent of insurers’ key personnel are experts in each of the five life insurance regulatory requirements, Towers said, and 27 percent understand the basics for each initiative.

“This expected reliance on in-house talent needs careful management to ensure complete and timely compliance,” Towers Watson said. “The introduction of multiple new financial reporting regulations and the promise of even more to come make it imperative that life insurers introduce a systematic approach for developing and advancing talent with the technical expertise to master these complex regulatory changes.”

Some outsourcing will be required to meet the new compliances; 80 percent said they would draw on a combination of maintaining the expertise in-house with some outsourcing to comply with the IFRS 4 Phase 2 framework.

Also according to the report:

  • CFOs expect to make only moderate, if any, changes to current staffing levels to address the new reporting requirements; technological knowledge largely will be maintained in-house, though there will be some outsourcing.
  • Most CFOs anticipate moderate changes to model governance, processes and controls for nearly all reporting requirements.
  • Most companies must make changes to current software models and production processes.
  • Half of those surveyed expect major changes to product design and pricing for universal life (UL) with secondary guarantees.
  • Most CFOs see the Own Risk and Solvency Assessment (ORSA) as beneficial, but more than 60 percent anticipate implementation challenges.

“Even if CFOs have people who know the intricate details of these regulations and are able to focus on near-and long-term planning for financial functions, that planning will be easier if CFOs are well-informed on the life insurance regulatory changes,” Gibson said. “But according to our results, the majority understand just the basics, or have a low-level knowledge-base on most of the reporting requirements.”
Most insurers said they expect to make moderate changes to their governance, process and controls in response to the regulations, and all will make changes precipitated by IFRS 4 Phase 2; 92 percent will make changes to meet the ORSA regulation, Towers Watson reported.

“Remarkably, many insurers don’t have significant controls and governance in place to meet these new requirements. They are best prepared for the NAIC’s ORSA (50 percent) and least prepared for the SSAP 102/92 (9 percent),” Towers Watson said.

The regulations likely will require insurers to change their current software models or modeling tools; 71 percent said changes to modeling software or tools would be required for all new regulations except SSAP 102/92.  IFRS 4 Phase 2 will require the most significant changes, according to 44 percent of participants, and 56 percent expect to make moderate changes to their modeling.

“Insurers that can create systems flexible enough to incorporate these new changes and to adapt to future changes will be best positioned to manage software-related costs and to leverage the usefulness of what could be a major investment. Some insurers might be able to use legacy systems, but for others, that will be a challenge,” Gibson said.

To implement new IFRS standards could take two years, according to 80 percent; and more than 60 percent anticipate significant or moderate challenges in implementing ORSA.

“The looming challenges are evident,” Gibson said. “Preparing for them provides insurers with a great opportunity to assess reserving and capital, reporting functions and enterprise risk management. They can also use it to reevaluate whether new talent is needed, or existing talent can be further challenged with new responsibilities.”

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