Chief financial officers from North American life insurance companies acknowledge that their industry faces considerable cost and talent management challenges coinciding with several significant regulatory initiatives, according to a new survey, "Insurers Face Significant Financial Reporting Changes" by Towers Watson. The survey explored life insurers’ preparation to comply with current and emerging regulatory reporting requirements, and the impact these new regulations will have on business operations.
The survey addressed requirements for the International Financial Reporting Standards (IFRS) 4 Phase 2; National Association of Insurance Commissioners (NAIC) Own Risk and Solvency Assessment (ORSA); NAIC Valuation Manual (VM) 20; Actuarial Guideline (AG) 38, revisions for 8D and 8E; and Statement of Statutory Accounting Principles (SSAP) 102/92.
“The complexity of these new life insurance regulatory requirements makes it imperative that insurers understand exactly how these changes will alter everything in their business – from supplementary reporting to capital financing for products such as universal life with secondary guarantees and term insurance,” said Jack Gibson, managing director, life insurance consulting, Towers Watson.
Half of the survey participants expect major changes to the product design and pricing for their universal life product with secondary guarantees. Seventeen percent will stop selling universal life altogether or significantly curtail its sale, while 33% will make changes on product design and/or pricing. Fifteen percent will implement major changes to their annuity products. More than half are considering design changes to their pension (55%) and retiree medical and life plans (64%).
“By far, the greatest impact of these new regulations will be felt by companies that write universal life with secondary guarantees. NAIC regulators have maintained that the design for many of these products does not sufficiently reflect the reserves they warrant,” said Gibson.
Only a small number (13%) of insurers’ key personnel are experts in each of the five life insurance regulatory requirements, while slightly over one-quarter of key personnel (27%) understand the basics for each initiative. Despite this, CFOs expect to make only moderate changes to current staffing levels. Much of the technical knowledge needed for each requirement will be maintained in-house, but not all, as some outsourcing will be needed to meet the new compliances. Eighty percent will draw on a combination of maintaining the expertise in-house with some outsourcing to comply with the IFRS 4 Phase 2 framework.
“Even if CFOs have people who know the intricate details of these regulations and are able to focus on near-and long-term planning for financial functions, that planning will be easier if CFOs are well-informed on the life insurance regulatory changes. But according to our results, the majority understand just the basics, or have a low level knowledge-base on most of the reporting requirements,” said Gibson.
Most insurers expect to make at least moderate changes to their governance, process and controls in response to all five regulations. All insurers will make changes precipitated by IFRS 4 Phase 2, and 92% will make changes to meet the ORSA regulation. Remarkably, many insurers don’t have significant controls and governance in place to meet these new requirements. They are best prepared for the NAIC’s ORSA (50%) and least prepared for the SSAP 102/92 (9%).
All new regulations are likely to cause changes to insurers’ current software models or modeling tools. In fact, 71% or more said changes to modeling software or tools will be needed for all new regulations except SSAP 102/92. The most significant changes will be needed for IFRS 4 Phase 2, where nearly half (44%) expect to make significant changes, with slightly over half (56%) expecting to make moderate changes to their modeling.
“Insurers that can create systems flexible enough to incorporate these new changes and to adapt to future changes will be best positioned to manage software-related costs and to leverage the usefulness of what could be a major investment. Some insurers might be able to use legacy systems, but for others, that will be a challenge,” said Gibson.
Eighty percent expect it to take two years to implement new IFRS standards, and more than 60% anticipate significant or moderate challenges in implementing ORSA. “The looming challenges are evident,” said Gibson. “Preparing for them provides insurers with a great opportunity to assess reserving and capital, reporting functions and enterprise risk management. They can also use it to reevaluate whether new talent is needed, or existing talent can be further challenged with new responsibilities.”
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