Tough times ahead for insurers

Pressure on insurance companies’ balance sheets, and declining sales in what were key growth businesses, are going to have a nasty impact on U.S. insurers in 2009, a new study from TowerGroup suggests. An early response may be a rollback on the benefits they currently offer to customers.

The TowerGroup study outlines “four Rs” — risk, revenue, regulation and retirement — as factors that will converge to cramp the insurance industry in 2009.

Most notably, risk and regulation will be the big factors as insurance carriers pump money and resources into initiatives designed to optimize risk management and meet new regulatory mandates. All of this will have to happen in an environment of rapidly decreasing sales and the retirement of a large portion of insurance company employees.

The days of insurance carriers being recession-proof businesses ended when they became major players in wealth management. As the markets have plummeted, so too have the risk and reserve burden of U.S. insurers, which, unlike traditional investment firms, have guarantees to meet on investment products they sell. There is no uptick in sales of products like variable annuities — which are guaranteed minimum-withdrawal products in Canada — to raise more capital.

“With the downside risk, nobody wants to get in the market right now,” says life insurance company analyst Rachel Alt-Simmons, TowerGroup’s research director for insurance. “The markets for [investment] products have fallen fairly precipitously. In the last couple of days there have been numbers coming out that say third quarter sales are down 20% from the previous years. That’s a big hit, especially since these products drive a lot of sales for insurers.”

Of course, in a down market, insurers have to top up the reserve requirements of their portfolios to meet their liabilities. For many U.S. insurers, there are limited avenues to do this, Alt-Simmons points out.

“The question is, what is the next perfect storm coming up? Since it is an unknown liability, they are taking a big hit in the marketplace. If you look at a company like Hartford Life, Lincoln Financial or Genworth, these are three companies that have bought thrifts and reorganized them as bank holding companies so that they can tap into the Troubled Assets Relief Program (TARP) money the U.S. government is offering,” she says. “These companies need to raise more capital to support their reserves and the products they have sold. Right now the market isn’t listening to that. Hartford can’t go out and issue more stock. Your options are limited to what you can do to get more money.”

Alt-Simmons does point out that Manulife’s successful private placement of $1.125 billion in stock announced on Tuesday is evidence that Canadian insurers are likely faring better.

“The big Canadian insurers, especially the big three, Manulife, Sun Life and GreatWest Life, all have huge markets in the United States. Anything going on here obviously is going to have some sort of big downstream impact on them,” she says. “There is some indication the Canadian companies are in much better shape. The question is, does everybody get painted with the same brush? It’s the same story in banking: not every company decided to invest in subprime mortgages, but because you’re a bank you get penalized anyway. AIG and a few others could be publicly tainting insurance companies that really aren’t doing all that bad.”

An immediate response to the pressure on their balance sheets in the U.S. has been to become more stingy on the benefits afforded to investors. Alt-Simmons expects the next group of variable annuities, for example, to be less consumer-friendly.

“What you’re going to see happen — we’re already seeing it — is they realize they may be offering too generous benefits at a price that they can’t support,” she says. “With new products that are being designed to come out in the next few months, the benefits are going to be scaled down and the pricing is going to go up.”

The TowerGroup report points out that insurance companies can do more to thrive during the downturn. Most important, Alt-Simmons stresses, is the need to communicate better to the end investor and policyholders. Transparency and clarity will help reduce the unease people have about buying insurance products..

“The industry as a whole can do a much better job of reassuring the public,” she says. “The products a lot of these insurers sell are really complicated. I’ve been following the news, and reading blogs, and I’ve found people don’t know what they’ve bought. They don’t understand the products very well. Sometimes they don’t even know which insurance company they bought their products from or how they are even protected,” she says.

The report notes that the very people best suited to spread the word — experienced insurance workers — are retiring en masse. Their years of knowledge are likely exiting with their retirement from the business. Some of this burden can be offloaded by more automated processes in underwriting and customer support.

Ultimately, the TowerGroup study says insurers need to create enterprise management solutions that disseminate information effectively throughout the enterprise.

“As a large number of experienced insurance workers reach retirement, the strain will increase on insurers, as decades of knowledge go out the door,” the report notes. “The automation of core business and underwriting processes will ease some of the stress, but tools exist that can facilitate the collection of information and collaboration between employees.”

(12/03/08)