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Life Insurers Reevaluating Their Capital Management Strategies

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Chief financial officers (CFOs) from North American life insurance companies are starting to reassess their capital management practices in order 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 said 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.

Over three-quarters (76%) of the CFOs indicated managing the level of capital has been the practice receiving the most attention in their organization, followed by monitoring the capital position (64%), determining capital requirements (58%) and optimizing capital efficiency (58%). The drivers differed significantly for stock and mutual life insurers. Not surprisingly, investor and analyst expectations (50%) play a sizable role in the capital management efforts of stock companies, and local regulatory requirements (50%) are also important. Mutual companies are more focused on shifting product preferences such as living benefit guarantees (50%), rating agency requirements (40%) and asset/liability issues (40%).

“In the wake of the financial crisis, precarious markets forced many life insurers to focus on immediate capital needs and solvency requirements,” said 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. 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%) 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%) have done so by streamlining legal entities, and almost a quarter (24%) 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%) expect to do so, while over one-fifth (21%) plan to streamline legal entities.

A majority (79%) said they have increased their capital and surplus over the past few years, though half deemphasized the sale of capital-intensive products and over one-third (36%) curtailed new business growth. CFOs expressed cautious optimism that the environment for capital raising will improve over the next year. Nearly half say the environment for credit availability (48%) and other securitizations (47%) will pick up, and 44% anticipate a better outlook for debt raising. They also voiced impediments, such as cost and availability of third-party reinsurance (40%), followed by the high cost of debt (27%) and uncertainty with future use of captives (27%).

“One of the top challenges for life insurers is to find the right balance between meeting new capital standards and achieving capital efficiency that will allow them to deliver new products and, in the case of stock companies, achieve an adequate level of return on investment. This is an increasingly complex, dynamic process driven by changes in rating agency requirements,” said Friedman.

Almost two-thirds (64%) anticipate their economic capital calculations will broaden over the next year. Most currently use economic capital (or plan to do so) in decision making in a number of areas, such as determining the right level of required capital (78%), strategic planning and capital allocation (78%), and facilitating discussions with rating agencies (75%). However, the CFOs also see challenges in making economic capital more widely accepted as a decision tool for risk taking. These include creating management buy-in and producing results in time frames that allow for utilization in the business.

About the Survey Program

Towers Watson’s Life Insurance CFO Survey Program provides ongoing research on issues of importance to the North American life insurance industry. The program enables CFOs and financial executives to benchmark their company’s approach to financial issues and challenges against those of their competitors. Participants benefit from Towers Watson’s independent analysis of the survey results, as well as perspectives on key issues facing the life insurance industry. This survey program was first launched in 2002, and includes responses from CFOs and senior financial executives from large and midsize North American life insurers.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at

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