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Life Insurance CFOs Concerned About New US Regulations

  • Synopsis: Published: 2011-06-21 - Life insurance chief financial officers are aware companies will be subject to US principle based statutory regulations but most said they have concerns regarding the new rules. For further information pertaining to this article contact: Towers Watson.

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Life Insurance CFOs Concerned About New U.S. Statutory Regulations, According to Towers Watson Survey - Executives guarded, but hopeful, about first quarter growth in GAAP net revenue and GAAP net income.

While North American life insurance chief financial officers (CFOs) are aware that their companies will be subject to U.S. principle-based statutory regulations, most said they have concerns regarding the new rules - both in terms of their readiness as well as the impact on the competitive landscape - according to data from the latest survey from global professional services company Towers Watson (NYSE, NASDAQ: TW), Regulatory and Reporting Issues.

Despite extensive educational efforts by the National Association of Insurance Commissioners, less than 20% of responding CFOs consider themselves very knowledgeable about the new framework, and 24% said that key personnel within their company know very little about the structure. The survey also found that only 60% of respondents have started preparing for VM-20, the principle-based requirement for life reserves, and most of these have just begun testing the impact based on existing interpretations. The remaining 40% of responding companies have not started planning or analyzing. Still, more than half (53%) expect to be ready to produce results under VM-20 by 2013 (assuming an adoption date of 2014).

"While somewhat alarming, these results may reflect the fact that effective dates for many of the principle-based requirements are either still unknown or at least three years away," said Craig Buck, Americas Life practice leader. "It is critical for companies to evaluate the impact of the new reserving and capital requirements well in advance of the effective date to better understand the potential implications, including changes to their product-specific and overall reserve and capital position."

CFOs are also concerned about the impact that the looming rule changes will have on the life insurance competitive landscape. Seventy-one percent said the new regulations will make results more difficult to compare across organizations and favor large companies at the expense of small ones, while 52% indicated that they expect the new regulations to result in the proliferation of alternative capital structures, with many anticipating higher capital requirements for their company.

The survey also found that many CFOs expect the new regulations to favor foreign-owned companies at the expense of domestic companies (44%) and protection products at the expense of accumulation products (47%).

"The main negative impact on smaller companies will be the significant increases in costs and resources needed to comply with the new regulations," said Buck. "All companies will incur additional costs in order to comply, but larger companies are more capable of absorbing this additional overhead. However, there is also the potential to gain deeper knowledge of the business through this process. Our view is that the ultimate winners will be companies that use the new information to enhance their strategic decision making, regardless of size."

CFOs remain wary, but are still optimistic about revenue and net income growth

Although their optimism has dampened from our prior survey, CFOs are still fairly positive about first quarter growth in GAAP net revenue and GAAP net income. Although 60% expected increases of at least 4% in new life and annuity premiums, 31% predicted a decrease. Respondents were much more optimistic about growth in new life premiums than in new annuity premiums. Slightly more than 60% expected first quarter GAAP net revenue to increase, while 11% of respondents predicted a decline. Just under half (48%) thought GAAP net income would increase compared with the same quarter last year, and 15% predicted a decrease.

Towers Watson's growth indices - based on the weighted average of survey responses - summarizing respondents' year-over-year growth outlook have generally climbed upward since 2009.

However, in our most recent survey, two of the indices fell, while one stayed the same.

The premium index remained steady at 101.

The GAAP net revenue index decreased slightly, from 107 to 105.

The GAAP net income index fell from 108 to 104.

While the indices for GAAP net revenue and GAAP net income have declined, they still indicate positive growth. However, the premium index remains in the "no growth" zone. (Towers Watson considers values between 97 and 103 to be flat growth.)

"The fact that there exists an upbeat overall outlook in life insurance revenues bodes well for the industry," said Buck. "Even though hurdles remain, we think we should see some improvement - albeit modest - for the balance of 2011."

About the survey - Twenty-five CFOs - 39% of the program's 64 registered members - participated in this survey. Because all of the survey questions were not applicable to all participating companies, the respondent base varies from question to question. The respondents are primarily CFOs from large and mid-size life insurance companies in North America; 46% of the companies have assets of $5 billion or more, and 20% are multinationals.

About Towers Watson - Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com

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