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 an Ernst & Young overview presented on Oct. 31.
The next area of regulatory scrutiny, now focused on investment research, may turn to the allocation of IPOs and high-net-worth clients, according to Robert Stein, chairman–global financial services with E&Y, New York.
Stein said that 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.
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Efficiency will be needed by all sectors of the financial services industry to respond to market doldrums and to position for the next year, these E&Y representatives contended.
For life insurers, market declines will show up on the balance sheet, according to Peter Porrino, global and Americas director–insurance industry services with E&Y.
Deferred acquisition costs will impact financial results of some variable annuity and life writers as market declines are reflected in a decline in assets backing these contracts, he explained.
As the value of assets decline, costs are amortized more quickly so that liabilities match assets.
Porrino said that DAC costs could continue to be an issue through 2003 if equity markets do not rebound.
The markets are already impacting annuity sales, with premiums declining 20% in 2001 and with the likelihood that it will drop again in 2002 to a level not seen since 1997, Porrino said. “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, according to Porrino. Mortality risk, which he says has significant embedded “mortality gains,” are being reinsured, he said. The life reinsurance market will continue to experience growth, he added.
If the equity market continues its current downturn, guaranteed benefits will also continue to present problems for some variable writers, Porrino said.