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Life insurers face big challenges in 2009

The global financial crisis will bring major changes to the US life insurance industry, impacting the balance sheets, operating performance and competitive positioning of many of these organisations, according to Ernst & Young's Global Insurance Centre US Outlook for the life insurance industry.

But for some insurers, opportunities will emerge as well.

Companies must adapt to this new economic climate and work strategically to identify trends to grow and remain competitive, said Doug French, Principal, Ernst & Young's Insurance and Actuarial Advisory Services.

The global economic crisis has caused worldwide setbacks, and as a result many companies in 2009 will focus on developing new products and services to combat costs to run their businesses more efficiently, French said.

Well positioned

The US life insurance industry is well positioned to tackle these issues and move forward from this crisis by taking the lessons learned to develop opportunities and become a true partner to their customers.

Ernst & Young has identified six significant challenges that the life insurance sector must address in 2009.

Shift product and investment focus to align with risk: Consumers have responded to the crisis by changing their risk appetites and moving away from variable products to fixed and universal life products that are perceived as more secure.

Simultaneously, insurers face balance sheet challenges after years of stability. The US life industry has realised and unrealised capital losses of $36.5 billion from bonds and preferred and common stocks through the third quarter, representing a 12% drop in surplus, according to Ernst & Young and Conning Research & Consulting.

Insurers agile enough to shift their focus to guaranteed-return products and create fixed returns may gain short-term advantages, while those companies able to squeeze performance from general account investments will likely gain longer term advantages.

Risk management

Retool risk modelling and measurement: In 2009, life insurance companies will incorporate risk management lessons learned into their existing enterprise risk management processes to stay ahead of their competition.

In terms of modeling priorities, line managers and corporate functions will have increasing responsibility to ensure that lessons learned are incorporated into the models. Companies that develop a holistic approach to ERM will be better equipped to maintain liquidity under future stress scenarios.

Anticipate changes in the regulatory environment: As a result of the financial crisis, one thing is certain - the industry will face increased regulation.

The regulations will likely be more intrusive, including ongoing monitoring of activities and financial performance. Life insurers will benefit from regulatory convergence because geography matters little in product design or consumer preferences.

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