As 2012 begins a report by Ernst and Youngh suggests the U.S. life and annuity insurance industry will be challenged to find ways to manage both capital and risk in an economically and politically uncertain year, while continuing to lay the groundwork for future growth.
In an era with increasing competition for life insurance sales, particularly from banks and other non-traditional sources, beng efficient and effective in the use of all an insurers resources are essential.
Another trend that may or may not continue is the increasing move toward whole life insurnce products.
The trends Ernst and Young identify were included in its new Global Insurance Center U.S. Outlook report.
"Pressures such as low interest rates, volatile equities markets, and a political and regulatory environment in flux will continue to impact the industry, making it difficult for insurers to boost earnings," according to Doug French, financial services and insurance and actuarial advisory services leader at Ernst & Young. "In spite of the current environment, insurers should take advantage of opportunities to drive efficiencies through greater use of customer analytics and leveraging technology to develop stronger ties to clients."
Ernst & Young lists five issues they believe U.S. life and annuity insurers should focus on in order to make 2012 a successful year:
First life and annuity insurers need to manage the company in a low interest rate environment with low interest rates which should persist until at least 2013, increasing the risk of spread compression for existing products. This will be difficut the report suggests because at the same time, efforts to increase sales of fixed annuities and universal life insurance are hampered by low rates. While interest rates are likely to remain low through 2013, they could climb rapidly after the Federal Reserve's Treasuries buying spree comes to an end, French says.
Next, insurers also need to prepare for the impact of accounting and regulatory convergence. Regulatory ambiguity will likely persist through 2012. Although the Dodd-Frank legislation has passed its first anniversary, many key rules have yet to be formalized, and Ernst and Young suggest that several will impact insurers. The Federal Insurance Office (FIO), created under Dodd-Frank may contend with the National Association of Insurance Commissioners (NAIC) around the Solvency II issue of “equivalency” for U.S. insurance regulation.
The report also suggests that insurers invest in customer analytics to drive efficiency and improve risk management. Analytic and predictive modeling techniques continue to improve, creating opportunities for increased sales, as well as improved efficiency and expanded capabilities. Life insurers are looking to use predictive modeling to improve the speed and accuracy of underwriting, which is traditionally time-consuming and expensive. Beyond underwriting, life insurers are increasingly using analytics and predictive modeling to create opportunities for increased sales and improved efficiency.
The Ernst and Young report also suggests that analytics can even mitigate strategic risks. "Given the extensive modeling of multiple scenarios required by the developing principles-based regulations, insurers will find that they can improve their risk management processes by gaining insight into the range of outcomes that can occur in the current volatile environment", according to the report.
A fourth item indicates that insurers need to monitor developments in life insurance taxation. Insurers may be challenged by future Congressional efforts to reform the federal tax code. Implications exist for both corporate-level taxes and policyholder tax issues. Budget deficits and revenue generation are serious concerns, yet they will remain in flux because of the economic and political changes underway. The health of the economy will be a central political issue in the 2012 general election, which could set in motion changes in the tax code that may have significant repercussions for the life insurance industry.
And finally the Ernst and Young report suggest insurers fully embrace the web for those that haven't already done so. Insurance companies have historically operated via a very traditional sales model involving agents and face-to-face sales approaches. At present, the extent of a life insurer’s presence on the Internet largely consists of financial calculators of insurance needs; lead-generating activity like educational materials and product information; and proprietary web applications that support the sales force through online forms and illustrations. Ernst and Young suggest that those elements are simply the tip of the iceberg. "While insurance may not currently lend itself well to web sales, life insurers can leverage the technology to develop stronger ties to customers and build a better brand – especially with younger, web-savvy generations of insurance buyers," according to the report.