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2005 Shaping Up To Be An Interesting Year

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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.

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.

In light of probes by Eliot Spitzer, New York state Attorney General, it is likely there will be new requirements for disclosure of life insurance compensation as well as for property-casualty insurers, Porrino said.

Robert Stein, chairman of E&Ys Global Financial Services practice, said boards of directors are having more impact than they did even 18 months ago as corporate governance practices are revisited. And more board sessions are being held without the companys CEO, he added.

Insurers and banks continue to separate the function of CEO and chairman of the board, he said. In 1998, 76% of banks and 85% of insurers had a combined post compared with a respective 68% and 60% in 2003, he added.

But even with the increased oversight, CEO compensation still remains relatively high, Stein said, noting that in 1993, the average CEO compensation for the top 50 banks and insurers was $2.6 million compared with $8.5 million in 2003.

One industry that is undergoing both regulatory and structural changes is the asset management industry, said Steven Buller, Americas director and global co-director of asset management services with E&Y.

In fact, according to Buller, the changes initiated by Spitzer have resulted in the average compliance staff increasing from 2.5 people and 2 part-time attorneys in 2002 to a total of 6 staff and 3 full-time attorneys, he said.

“Eliot Spitzer and the SEC may not be done yet,” he said, adding that there will need to be fee harmonization.

The change comes at a time when the industry is undergoing structural change, Buller said. A total of 42% of all fund groups had negative outflows, suggesting the industry is at a crossroad and a number of challenges need to be addressed, he continued.

The retail investor is putting less money in 401(k)s and more money in bank investment products, separate managed accounts, accounts that are tailored to an individuals needs and hedge funds, Buller said.

Going forward, asset managers are going to have to attract both high net worth and more middle class investors, he explained. It is akin to having one building with an entrance that says Neiman-Marcus and another entrance that says Wal-Mart, he added.

Reproduced from National Underwriter Edition, November 11, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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