CFOs Foresee Dramatic Change in Competitive Landscape
STAMFORD, CONN., November 12 /CNW/ - CFOs report far greater
understanding of principles-based regulation than they did in 2006 and are
making notable progress in preparing for the new regulation, according to the
latest survey of Life Insurance CFOs by the Tillinghast insurance consulting
practice of Towers Perrin.
While only 8% of CFOs surveyed consider themselves very knowledgeable
about principles-based regulation, all of the rest understand at least the
basics. Furthermore, 42% say that planning is well under way, and 12% have
either largely implemented or are establishing a structure for migrating from
a formula-based approach for reserves and capital to a principles-based
approach. By contrast, last year's survey found that nearly half of
respondents (44%) knew very little or were not at all familiar with the
regulations, and only 17% had any planning under way.
The survey, the third of its kind administered in 2007, explored how
familiar CFOs are with International Financial Reporting Standards (IFRS),
fair-value reporting and principles-based regulation, as well as the projected
impact each will have on their companies and their ability to compete. In
addition, CFOs were asked about their company's financial performance compared
to the same quarter last year.
"Companies are rising to the challenge and are making progress in
educating themselves about and preparing for the upcoming regulatory changes,"
said Hubert Mueller, Principal and CFO Survey Leader at Towers Perrin. "What's
more, this increased knowledge is evident throughout the company, not just at
the highest levels, which further demonstrates the seriousness of CFO
commitment to the new regulation."
CFOs Foresee Challenges
Nevertheless, while the vast majority of companies surveyed agree that
principles-based regulation is needed (80%), most also have concerns about
implementation. This is consistent with findings from last year, when 82% were
in favor of regulation, but expressed implementation concerns. Furthermore,
many companies are pessimistic about when principles-based regulation will be
fully implemented for capital and reserves, with the majority saying it won't
happen until 2010 or later.
"After seeing data indicating momentum in planning for principles-based
regulation, we were interested to find that most CFOs don't really expect it
to happen for several more years," said Jack Gibson, Managing Principal for
the firm's North American life insurance practice. "While there have been
delays over the variable annuities reserve standard, we project the timeline
for full implementation to be shorter than most respondents'. It's therefore
important that CFOs recognize that this is a big job and are planning
Most respondents believe that principles-based regulation will
dramatically change the competitive landscape for life insurers. Nearly all
respondents (87%) think there will be a greater need to develop hedging
programs in response to the regulation, and nearly 80% are concerned about the
ensuing inability to compare results across companies. Additionally,
respondents believe the regulation will make dealing with regulators and other
external parties more costly and complex, forcing them to increase resources.
Finally, 75% of respondents foresee a greater need for modeling resources and
capacity with respect to their risk management framework.
Market-Consistent Reporting Gaining Ground
The use of market-consistent reporting methods is rapidly increasing, as
44% of the companies surveyed are already preparing some financial reports
using a market-consistent basis now or plan to do so within the next three
years. The most popular applications for reporting on a market-consistent
basis are embedded value, value of new business and economic capital.
Views vary, however, on some of the details about what constitutes a
market-consistent valuation. While almost all respondents (95%) agreed that it
was undesirable for policyholder liabilities to be reduced to reflect the risk
of the company defaulting on its obligations, they were split on whether
policyholder liabilities should be increased to reflect deemed profit margins
on any separately identifiable service element of a contract, with 40%
agreeing they should. There were also divergencies of view on the correct
allowance to be made for future premiums, whether expenses should be related
to market- or entity-specific levels, and whether liabilities should be
subject to a surrender value floor.
"These divergencies of view are mirrored in the wider practitioner
community and among the accounting regulators," according to Peter Wright, a
Principal with the firm's London office who leads the firm's worldwide working
party tracking progress with the IASB's insurance project. "It would require a
great deal of work to achieve consensus and, in the end, it may be necessary
to impose a solution in some cases."
Knowledge of IASB Discussion Paper Still Lacking
More than 100 countries have joined the IASB's project toward
implementation of Phase II of IFRS. With the FASB's decision about whether to
join with the IASB on IFRS Phase II less than a year away, 56% of CFOs
surveyed say they understand the basics of the IASB discussion paper, but very
few (8%) consider themselves very knowledgeable. That said, many are engaged
and are taking an active role in shaping the key issues, with more than half
planning to or considering responding to the IASB or FASB with comments on the
IASB Discussion Paper, Preliminary Views of Insurance Contracts.
"We believe the increasing emphasis on fair value and the expected
consensus between the IASB and FASB on Phase II of IFRS will lead a growing
number of North American life insurers to consider market-consistent embedded
value as a supplementary reporting metric for performance measurement and
external reporting", according to Mueller.
CFOs' Outlook Calls for Moderate Growth
Comparable to last quarter, 60% of respondents predicted growth of four%
or higher in new life and annuity premiums over the same quarter last year.
GAAP net revenue and GAAP net income will each increase by 4% or more,
according to 63% of respondents.
The CFO Survey Growth Indices indicate a slight uptick in CFOs' forecasts
for year-over-year growth in new life and annuity premiums and GAAP net
revenue, and a slight decline for GAAP net income. While CFOs' outlook for
premiums and GAAP net revenue has not changed much over the past year, their
outlook for GAAP net income has been somewhat more volatile.
About Tillinghast's Life Insurance CFO Survey
This Web-based survey, which was conducted in August and September 2007
by the Tillinghast business of Towers Perrin, is the 18th in a series of pulse
surveys that explore issues important to the North American life insurance
industry and its CFOs. This three-part survey focused on how companies are
dealing with IFRS, fair-value reporting and principles-based regulation. It
also explored CFOs' expectations for third quarter results.
Respondents included 25 CFOs (32% of the program's 77 registered
members). Over three-quarters of respondents were from insurance companies
with U.S. (64%) or North American (12%) focused operations. Most responding
companies (70%) had assets of $5 billion or more, and 16% were multinational
insurers. For more information on this survey program, please contact program
leader Sarah Prevett at 212-309-3979 or firstname.lastname@example.org.
About Towers Perrin and Tillinghast
Towers Perrin is a global professional services firm that helps
organizations improve their performance through effective people, risk and
financial management. Through the Tillinghast line of business, Towers Perrin
provides consulting and software solutions to insurance and financial services
companies and advises other organizations on risk financing and
self-insurance. Tillinghast helps clients improve business performance in
areas related to their financial, risk, product, distribution and capital
issues. The firm also provides human resource consulting and reinsurance
intermediary services. Together these businesses have offices and business
partner locations in the United States, Canada, Europe, Asia, Latin America,
South Africa, Australia and New Zealand. More information about Towers Perrin
is available at www.towersperrin.com.
For further information:
For further information: Ketchum Jackie Burton, 646-935-4120