Most North American life insurance chief financial officers are concerned about new principle-based statutory regulations, both in terms of their readiness and the impact on the regulations on the competitive landscape.
Towers Watson (NYSE, NASDAQ: TW), New York, published this finding in a summary of results from a survey of 25 CFOs The respondents are primarily CFOs from large and midsize life insurance companies in North America; 46% of the companies have assets of $5 billion or more, and 20% are multinationals.
Despite educational efforts by the National Association of Insurance Commissioners, less than 20% of responding CFOs consider themselves very knowledgeable about the new framework. And 24% say that key personnel within their company know very little about the structure.
The survey also funds that only 60% of respondents have started preparing for VM-20, the principle-based requirement for life reserves. And most of these have just begun testing the impact based on existing interpretations.
The remaining 40% of responding companies have not started planning or analyzing. But more than half (53%) expect to be ready to produce results under VM-20 by 2013 (assuming an adoption date of 2014).
“While somewhat alarming, these results may reflect the fact that effective dates for many of the principle-based requirements are either still unknown or at least three years away,” says Craig Buck, Americas Life practice leader. “It is critical for companies to evaluate the impact of the new reserving and capital requirements well in advance of the effective date to better understand the potential implications, including changes to their product-specific and overall reserve and capital position.”
CFOs are also concerned about the impact that the looming rule changes will have on the life insurance competitive landscape.
Seventy-one percent say the new regulations will make results more difficult to compare across organizations and favor large companies at the expense of small ones. And 52% indicate they expect the new regulations to result in the proliferation of alternative capital structures, with many anticipating higher capital requirements for their company.
The survey also found that many CFOs expect the new regulations to favor foreign-owned companies at the expense of domestic companies (44%) and protection products at the expense of accumulation products (47%).
“The main negative impact on smaller companies will be the significant increases in costs and resources needed to comply with the new regulations,” says Buck. “All companies will incur additional costs in order to comply, but larger companies are more capable of absorbing this additional overhead.
“However, there is also the potential to gain deeper knowledge of the business through this process, Buck adds. “Our view is that the ultimate winners will be companies that use the new information to enhance their strategic decision making, regardless of size.”
–Warren S. Hersch