Life Insurers Face Major Financial, Regulatory Reporting Changes

In response to new regulations, half of life insurance company chief financial officers (CFOs) expect to see major changes in product design and pricing of their universal life product with secondary guarantees. Seventeen percent say that their companies will stop selling universal life altogether or significantly curtail sales while 33% will make changes to product design and/or pricing, according to a survey by Towers Watson.

Fifteen percent will implement major changes to their annuity products. Fifty-five percent are considering design changes to their pension plans and 64% are considering changes to their retiree medical and life plans.

The survey addresses 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.

“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 Jack Gibson, managing director, life insurance consulting, Towers Watson.

“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 Gibson.

“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. Despite this, CFOs expect to make only moderate staffing changes. Eighty percent will draw on a combination of expertise in-house with some outsourcing to comply with the IFRS 4 Phase 2 framework.

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 the new regulations are likely to cause changes to insurers’ 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. 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,” said Gibson. For more information, visit towerswatson.com.

Last Updated 11/25/2020

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