Chief financial officers (CFOs) from North American life insurance companies are reassessing their capital management practices to make their programs more efficient, according to a new life insurance CFO survey conducted by global professional services company Towers Watson (NYSE, NASDAQ: TW).
Nearly two-thirds of the survey respondents say their companies have recently redefined their risk appetite or are considering doing so in the near future. The CFOs also affirmed they are shifting from traditional stand-alone capital measurements toward the use of multiple metrics, with economic capital expected to play an increasingly important role. Almost half indicated that satisfying rating agencies has been the primary driver in determining capital requirements.
“Use of multiple capital metrics should assure policyholders, regulators, rating agencies — and, in the case of stock companies, investors — that life insurers are financially sound and ought to provide the confidence and market vigor to ensure the industry remains competitive,” said Jack Gibson, managing director, Life Insurance consulting, Towers Watson.
More than three-quarters (76 percent) of the CFOs indicated managing the level of capital has been the practice receiving the most attention in their organization. This is followed by monitoring the capital position (64 percent), determining capital requirements (58 percent) and optimizing capital efficiency (58 percent).
The drivers differed significantly for stock and mutual life insurers. Not surprisingly, investor and analyst expectations (50 percent) play a sizable role in the capital management efforts of stock companies, and local regulatory requirements (50 percent) are also important. Mutual companies are more focused on shifting product preferences, such as living benefit guarantees (50 percent), rating agency requirements (40 percent) and asset/liability issues (40 percent).
“In the wake of the financial crisis, precarious markets forced many life insurers to focus on immediate capital needs and solvency requirements,” says Elinor Friedman, Towers Watson’s Life Insurance sales and practice leader for the Americas. “Today, stabilizing world economies are providing life insurers with some relief.
“This, in turn, gives them the opportunity to take a more comprehensive and strategic look at their capital management efforts,” Friedman adds. “It also allows them to focus on how well their capital management programs withstood the crisis and what can be done to strengthen oversight in the future.”
Over the last two years, more than half (55 percent) of the CFOs said they have taken actions to improve their capital fungibility (i.e., the movement of capital among legal entities). One-third (33 percent) have done so by streamlining legal entities and almost a quarter (24 percent) have reallocated capital.
Looking ahead, insurers said reallocation of capital is the most likely course of action to improve capital fungibility in the next year, as one-third (33 percent) expect to do so, while over one-fifth (21 percent) plan to streamline legal entities.