BROOKLYN, N.Y.–The capital market freeze could force life insurers to revamp their product lines, speakers said here at a conference organized by Standard & Poor’s, New York.

Sellers of products such as term life and universal life may have to cope with a drop in the flow of cheap capital by increasing rates, Kevin Ahern, an S&P senior director, said during one panel.

Several speakers talked during another panel about the need to revise variable annuity benefits guarantees.

At VA operations, “People just got comfortable with the stock continuing to go up,” said Dennis Glass, president of Lincoln National Corp., Radnor, Pa.

Donald Guloien, president of Manulife Financial Corp., Toronto, recalled that VA issuers started by offering customers guarantees that they would get at least 75% of their principal back, then moved up to guaranteeing 100% principal. Later, they started including “ratchets,” “step-ups” and other features that guaranteed more than 100% of principal.

“We have to offer the consumer a good value that doesn’t expose the insurance company to extreme risk,” Guloien said.

“Frankly, the prices are going to have to go up,” said Edward Zore, chairman of Northwestern Mutual Life Insurance Company, Milwaukee. “There are going to higher margins, and some of the whistles and bells are going to disappear.”

Zore and Guloien sparred over the role of distribution channels in controlling product-related risk.

At Northwestern, a company with its own career agents, producers “have an obligation to sell what we deliver,” Zore said. At a company that sells through brokers, “you’re going to be competing with the lowest common denominator.”

But at Manulife, which sells through both brokers and career agents, careful oversight helps prevent either channel from letting producers sell unprofitable business, Guloien said.

Glass noted that, overall, problems with investments are causing much more serious problems than are VA guarantees or other products.

Gregory Gaskel, an S&P director and moderator of the panel that featured the top life company executives, asked Zore about the performance of the “enterprise risk assessment” approach to managing investment risk and other types of risk.

“Obviously,” Zore replied, “it failed the financial industry, because we have a big financial mess.”

One problem is that many risk modelers stuck to using data and assumptions based on the bull market years of the 1990s and 2000s. They failed to consider the effects of “tail risk,” or the possibility that the unusual circumstances at the far right and far left of probability curves might come true, Zore said.

Some modelers seemed to ignore the possibility that real estate prices could go down, Zore complained.

Even if a company tried to appoint a risk manager to remind other people in a company of the possibility of bad things happening, “most people won’t even pay attention to that person,” Zore said.

Gaskel asked the top life company executives whether the recession has changed the nature of board oversight.

“It’s changed,” Glass said. “I’ve had more board conversations I ever had before.”

The government and shareholders will insist that boards be more independent and make more of an effort to challenge management, even when results are good, Guloien said.

Asset Management Challenges

Today, Glass said, consumer confidence seems to be coming back, and the capital markets seem to be warmer than they were a few months ago. But capital losses and the difficulty of earning decent returns in a difficult investment climate continue to challenge insurers.

The uncertainty about whether the recession will cause deflation, or whether government intervention will lead to inflation, is especially challenging, Zore said.

“We’re trying to figure out what to do about that,” Zore said.

Northwestern Mutual has tried to hedge against inflation risk by buying gold, Zore reported.

At life insurers that continue to have high ratings, a consumer “flight to quality” has led to a welcome increase in fixed annuity sales.

MetLife Inc., New York, is thinking about investing some of the cash flowing in by expanding mortgage origination efforts, according to Steven Kandarian, MetLife’s chief investment officer.

“We’re tiptoeing back into the marketplace,” Kandarian said.