Life Insurers Reevaluating Their Capital Management Strategies
17 September 2014 - 11:14PM
Business Wire
Shift under way toward use of multiple metrics to balance
capital strength and efficiency
Chief financial officers (CFOs) from North American life
insurance companies are starting to reassess their capital
management practices in order to make their programs more
efficient, according to a new life insurance CFO survey conducted
by global professional services company Towers Watson (NYSE,
NASDAQ: TW). Nearly two-thirds of the survey respondents said their
companies have recently redefined their risk appetite or are
considering doing so in the near future.
The CFOs also affirmed they are shifting from traditional
stand-alone capital measurements toward the use of multiple
metrics, with economic capital expected to play an increasingly
important role. Almost half indicated that satisfying rating
agencies has been the primary driver in determining capital
requirements. “Use of multiple capital metrics should assure
policyholders, regulators, rating agencies — and, in the case of
stock companies, investors — that life insurers are financially
sound, and ought to provide the confidence and market vigor to
ensure the industry remains competitive,” said Jack Gibson,
managing director, Life Insurance consulting, Towers Watson.
Over three-quarters (76%) of the CFOs indicated managing the
level of capital has been the practice receiving the most attention
in their organization, followed by monitoring the capital position
(64%), determining capital requirements (58%) and optimizing
capital efficiency (58%). The drivers differed significantly for
stock and mutual life insurers. Not surprisingly, investor and
analyst expectations (50%) play a sizable role in the capital
management efforts of stock companies, and local regulatory
requirements (50%) are also important. Mutual companies are more
focused on shifting product preferences such as living benefit
guarantees (50%), rating agency requirements (40%) and
asset/liability issues (40%).
“In the wake of the financial crisis, precarious markets forced
many life insurers to focus on immediate capital needs and solvency
requirements,” said Elinor Friedman, Towers Watson’s Life Insurance
sales and practice leader for the Americas. “Today, stabilizing
world economies are providing life insurers with some relief. This,
in turn, gives them the opportunity to take a more comprehensive
and strategic look at their capital management efforts. It also
allows them to focus on how well their capital management programs
withstood the crisis and what can be done to strengthen oversight
in the future.”
Over the last two years, more than half (55%) of the CFOs said
they have taken actions to improve their capital fungibility (i.e.,
the movement of capital among legal entities). One-third (33%) have
done so by streamlining legal entities, and almost a quarter (24%)
have reallocated capital. Looking ahead, insurers said reallocation
of capital is the most likely course of action to improve capital
fungibility in the next year, as one-third (33%) expect to do so,
while over one-fifth (21%) plan to streamline legal entities.
A majority (79%) said they have increased their capital and
surplus over the past few years, though half deemphasized the sale
of capital-intensive products and over one-third (36%) curtailed
new business growth. CFOs expressed cautious optimism that the
environment for capital raising will improve over the next year.
Nearly half say the environment for credit availability (48%) and
other securitizations (47%) will pick up, and 44% anticipate a
better outlook for debt raising. They also voiced impediments, such
as cost and availability of third-party reinsurance (40%), followed
by the high cost of debt (27%) and uncertainty with future use of
captives (27%).
“One of the top challenges for life insurers is to find the
right balance between meeting new capital standards and achieving
capital efficiency that will allow them to deliver new products
and, in the case of stock companies, achieve an adequate level of
return on investment. This is an increasingly complex, dynamic
process driven by changes in rating agency requirements,” said
Friedman.
Almost two-thirds (64%) anticipate their economic capital
calculations will broaden over the next year. Most currently use
economic capital (or plan to do so) in decision making in a number
of areas, such as determining the right level of required capital
(78%), strategic planning and capital allocation (78%), and
facilitating discussions with rating agencies (75%). However, the
CFOs also see challenges in making economic capital more widely
accepted as a decision tool for risk taking. These include creating
management buy-in and producing results in time frames that allow
for utilization in the business.
About the Survey Program
Towers Watson’s Life Insurance CFO Survey Program provides
ongoing research on issues of importance to the North American life
insurance industry. The program enables CFOs and financial
executives to benchmark their company’s approach to financial
issues and challenges against those of their competitors.
Participants benefit from Towers Watson’s independent analysis of
the survey results, as well as perspectives on key issues facing
the life insurance industry. This survey program was first launched
in 2002, and includes responses from CFOs and senior financial
executives from large and midsize North American life insurers.
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 consulting, technology and solutions
in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates
around the world and is located on the web at towerswatson.com.
Towers WatsonJosh Wozman, +1
703-258-7670josh.wozman@towerswatson.comorBinoli Savani, +1
703-258-7648binoli.savani@towerswatson.com
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