Ernst & Young has identified the seven important issues that may shape the life insurance sector in 2008:
1. Retirement Income: The best prospect for organic growth in the insurance industry is found in the 35 million middle-wealth baby boomers facing the realities of retirement. As they shift their defined contribution plans, they may seek predictable, low-cost, income-producing financial products. That said, insurance companies could be more aggressive in competing with other financial services institutions that target this segment.
2. Financial Events: Over the past five years, insurers have increased their investments in alternative asset classes, which has led to greater credit risk exposure. Now is the time to take action and focus on building risk infrastructure and creating more transparency commensurate with the nature of these important investments. Organizations that embrace the people, systems and processes to accurately comprehend and manage the risks of these asset classes may gain an edge.
3. Technology: Insurers could take a comprehensive view of data governance and management as they attempt to create a more efficient, interconnected technology environment. In 2008, many insurers may still be forced to expend resources integrating data from disparate systems, but they could quickly move ahead of the trend toward centralizing IT infrastructure (data centers, servers and converged networks).
4. Offshoring: As insurance companies challenge their growing expenses, they may become increasingly reliant on alternative sourcing strategies, especially as outsourcing service providers expand their offerings. However, insurance companies need to implement risk management programs for outsourcing/offshoring, because risks from service interruption, customer data, information security and privacy exposures could far outweigh any benefits from cost reduction.
5. Solvency II:[/]b]he implementation of Solvency II (SII) may pose a considerable challenge with far reaching implications for insurers. Besides the extensive improvements to systems, processes and data SII calls for, the convergence of accounting, risk and actuarial information may also challenge traditional actuarial pactitioners to develop more sophisticated financial and risk management methodologies and more efficient deployment of capital.
6. [b]International Financial Reporting Standards: Regardless of the imementation date being delayed, there is no time to waste for Iternational Financial Reporting Standards (IFRS) preparation. Companies need to develop a plan that includes steps to assess the impact of the proposals on their financial statements, educate key employees and constituents, and evaluate the readiness of their organization for implementation.
7. Tax Issues and Implications: Debate on tax rules that would require dividends to again be taxed as ordinary income, raise the capital gains rate to 20 percent, and change current estate tax regulation is not expected to heat up until after the 2008 election. Essentially, a new President and Congress may be forced to deal with many tax decisions, most of which may require tax increases. Unfortunately, the impact of future tax legislation on insurers and any implications this will have on product offerings may remain unclear for some time.
"The life insurance industry seems to be on firm financial ground, which is good news: insurers are doing many things right. But, in some ways, the obstacles for continued growth have never been higher," said French. "To remain competitive, executives must continue to foster innovation in their products, develop new ways to manage and oversee both risk and capital management, and prepare now for a torrent of new regulations that may very well revolutionize this industry in the next decade."
