Life insurers are looking more like asset managers and asset managers are facing structural changes going forward, according to Ernst & Young executives who spoke during the firms annual review of the state of the financial services industry.
The life insurance industry is shedding mortality risk, relying instead on fees and margins from assets under management, said Peter Porrino, Americas director of financial services practice and global director of insurance industry services, with Ernst & Young, New York.
While those assets under management have contributed to strong performance, cost control has been a real driver of recent returns, he added. General expenses as a percentage of total assets dropped 31 basis points to 1.11% in 2003 compared with 1.42% in 1992, Porrino said.
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The improvement does not suggest that efforts to control distribution expenses could mean the end of the career agent, he said, but rather that there will be a “slow attrition” of career agents.
Strategic acquisitions also will help insurers with results, he said. In 2003, he noted, there were a number of strategic mergers and acquisitions which were followed by a lull in 2004. However, he anticipates activity picking up again in 2005.
“Cost levels are so important that there will be a need to get costs down through consolidation,” he said. Expansion of distribution will be achieved through acquisition, he continued, and European insurers could return to the market.
In fact, according to Porrino, strategic deals in the $10 billion to $20 billion range will be done by reasonably big companies.
Consolidation was also an issue touched on by Barry Kroeger, deputy director of E&Ys Americas banking and capital markets practice. The consolidation trend among over 7,000 banks in the U.S. will continue apace, he added.
Porrino also said that in light of heightened regulatory scrutiny, insurers will have to be more aware of “reputational risk” going forward. Additionally, in the future, there will be more stringent rules on what constitutes risk transfer, he predicted.