NU Online News Service, Jan. 14, 2005, 10:40 a.m. EST

Life insurers will strive to balance product innovation with new statutory capital reserve requirements in the year ahead, Ernst & Young LLP says in its 2005 outlook for the industry.[@@]

To achieve that balance, life companies will need a thorough understanding of the impact that new options and guarantees will have on reserves so they can price their new products correctly, says E&Y, New York.

“The demand for more innovative products will only intensify as consumers struggle with the transition to self-funding of retirement, and the boomer generation seeks ways to create guaranteed income streams in retirement,” E&Y says.

“There is a real tug-of-war going on in the market between consumer demand and statutory requirements,” says Ellen Cooper of E&Y’s insurance and actuarial advisory services’ life-health practice. “Smart companies will learn to satisfy both audiences through vigilant pricing, aggressive hedging and utilization of reinsurance options that are beginning to re-emerge.”

E&Y predicts that life insurers will turn to securitization, or the packaging of risk as securities, to help meet the need for additional capital demanded by regulations such as XXX and AXXX.