While 80% of CFOs in a new survey support the concept of principle-based reserving, fewer than 40% favor the way it is currently being defined and implemented while 26% are opposed, according to the survey by Towers Perrin’s Tillinghast unit.
A principle-based approach to reserving is a “watershed event,” according to Hubert Mueller, a principal with Towers Perrin, Hartford, and CFO survey leader. “This is the biggest thing since the early 1980s when the valuation laws changed.”
But the survey suggested that CFOs think it might take a while to implement. Some 64% said they anticipate it will be fully implemented by 2009 or later for life insurance products and half of those surveyed saw the same timeframe for annuities.
The survey listed changes to the competitive landscape that CFOs anticipated. Some 90% said a principle-based approach will create a need for hedging programs; 82% that greater flexibility will lead to new ways to manipulate the system; 81% that it would create a lack of comparability of results across companies; and 70% that it will significantly reduce reserve redundancies for term and UL with secondary guarantee products.
The survey found that 8% had largely implemented preparations for the new approach; 4% were setting up committees; 17% had planning well under way; 46% are just starting to analyze; and 25% currently are in a “wait and see” mode.
Among the anticipated changes respondents noted were unanimous agreement that there will be a greater need for company resources as well as the recognition that companies will see an increase in expense levels.
For instance, Mueller says hedging requirements that companies implement will take a while before they start producing benefits for companies. Typically, he explains, it takes 3-5 years to get real experience and only one company has been doing it for 3 years. Companies will have to treat implementation of such programs as an investment, he continues.
But, for companies that want to offer new products with different risk profiles, and offer “more competitive pricing and lower cost for consumers,” time and investment in the new approach will be worth the effort, the report says.
For instance, Mueller says companies offering living benefits with variable annuities are experiencing increases in sales and, for such companies, investments in hedging programs will be necessary to remain competitive.