NU Online News Service, Nov. 5, 10:55 a.m. – A down equity market and demand for better corporate governance are just two factors that will shape financial services companies through 2003, experts explained during a recent industry overview by accounting firm Ernst & Young L.L.P., New York.
The next area of regulatory scrutiny, now focused on investment research, may turn to the allocation of initial public offerings and high-net-worth clients, said Robert Stein, chairman-global financial services of E&Y.
Changes in corporate governance initiated by regulators can have a positive impact on the financial services industry as long as they do not create inefficiencies and stifle the willingness to take risks, Stein said.
Efficiency will be needed by all sectors of the financial services industry to respond to market doldrums and to position for the next year, the E&Y representatives contended.
For life insurers, market declines will show up on the balance sheet, said Peter Porrino, global and Americas director of insurance industry services with E&Y.
Deferred acquisition costs will make an impact on financial results of some variable annuity and life writers as market declines are reflected in a decrease in assets backing these contracts, he explained.
As the value of those assets fall, costs are amortized more quickly so that liabilities match assets, he explained.
Porrino said that DAC costs could continue to be an issue through 2003 if equity markets do not rebound.
The markets are already hurting annuity sales, with premiums declining 20% in 2001 and likely to drop again in 2002 to a level not seen since 1997, Porrino predicted.
“It is a huge issue for life companies that have cast their lot with variable products,” he added.
Life insurers are becoming more like asset managers, Porrino said. Mortality risk, which he says has significant embedded “mortality gains,” is being reinsured. Meanwhile, the life reinsurance market will continue to experience growth.
If the equity market continues its current downturn, guaranteed benefits will also continue to present problems for some variable writers, Porrino said.