Life insurers face financial, regulatory and reporting changes

Most insurers expect to make at least moderate changes to their governance, process and controls in response. Most insurers expect to make at least moderate changes to their governance, process and controls in response.

Chief financial officers from North American life insurance companies acknowledge that their industry faces considerable cost and talent management challenges coinciding with several significant regulatory initiatives, according to a new survey by global professional services company Towers Watson.

The survey explores life insurers’ preparation to comply with current and emerging regulatory reporting requirements, and the impact these new regulations will have on business operations.

The survey addresses 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.

“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,” says Jack Gibson, managing director, life insurance consulting, Towers Watson.

Half of the survey participants expect major changes to the product design and pricing for their universal life product with secondary guarantees. Seventeen percent will stop selling universal life altogether or significantly curtail its sale, while 33 percent will make changes on product design and/or pricing.

Fifteen percent will implement major changes to their annuity products. More than half are considering design changes to their pension (55 percent) and retiree medical and life plans (64 percent).

Only a small number (13 percent) of insurers’ key personnel are experts in each of the five life insurance regulatory requirements, while 27 percent of key personnel understand the basics for each initiative.

Despite this, CFOs expect to make only moderate changes to current staffing levels. Much of the technical knowledge needed for each requirement will be maintained in-house, but not all, as some outsourcing will be needed to meet the new compliances. Eighty percent will draw on a combination of maintaining the expertise in-house with some outsourcing to comply with the IFRS 4 Phase 2 framework.

Most insurers expect to make at least moderate changes to their governance, process and controls in response to all five regulations. All insurers will make changes precipitated by IFRS 4 Phase 2, and 92 percent will make changes to meet the ORSA regulation.

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

All new regulations are likely to cause changes to insurers’ current software models or modeling tools, the report states. In fact, 71 percent or more said changes to modeling software or tools will be needed for all new regulations except SSAP 102/92.

The most significant changes will be needed for IFRS 4 Phase 2, where nearly half (44 percent) expect to make significant changes, with slightly over half (56 percent) expecting to make moderate changes to their modeling.

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