NU Online News Service, Oct. 16, 10:00 a.m. – Life insurance companies are giving higher priority to their risk and capital management practices, according to a Tillinghast-Towers Perrin survey of chief financial officers of North American life insurers.

The survey was the second in a series of Web-based “pulse” surveys of North American life insurance CFOs conducted by Tillinghast, New York, an actuarial and management consulting firm.

This installment examined risk and capital management practices. In particular, the survey looked at how insurers are responding to volatile capital markets and proposed regulatory changes that have brought an increased focus on risk and capital management practices.

Although most survey participants are conducting one or more types of scenario testing to analyze future earnings volatility, many are focused on less sophisticated approaches, such as selective stress testing of assumptions. Only 37% of all companies analyze earnings volatility on a total company basis using extensive scenario testing, the survey found.

While life companies’ current use of scenario testing is primarily to comply with regulatory requirements (reported by 57%), two thirds of all respondents are considering increasing the degree to which they use scenario testing to address internal needs of senior management and to enhance the strategic decision-making process.

Eighty percent of respondents currently offer some form of equity-based products, with variable annuities and segregated fund products most prevalent in the U.S. and Canada, respectively, Tillinghast says.

Companies are being challenged to generate the expected financial returns from their equity-based products in light of the prolonged equity market downturn, the company says. Almost all (96%) respondents offering equity-based products have seen their earnings from these products hurt by the drop in the equity markets.

However, according to the survey, few life insurers appear to be proactively managing the risks of equity-based product guarantees. More than half of the respondents rely on passive strategies such as collecting fees and paying claims, or holding additional capital, and another 38% use reinsurance to manage these risks, Tillinghast says.

Sixteen percent are pursuing hedging strategies to manage the downside risks of the guarantees offered on these products, according to the survey.

Despite the recent economic turmoil and mixed results to date, respondents expect moderate growth in the third quarter, according to the survey. More than 40% of respondents predict that third quarter revenues will grow greater than 10% over the same quarter last year.

The CFOs are similarly optimistic about net income growth. Thirty percent of respondents expect a similar rate of growth in net income. However, 34% predict a decrease in net income, possibly due to asset defaults at the beginning of the quarter, Tillinghast says.

Respondents are fairly optimistic about the outlook for new life and annuity premium growth over the next three years, with almost half predicting increases of greater than 10% per annum.