Hedging has saved US insurers billions…
Aegon opts out of participation in TARP…
SEC snatches control of indexed
Swiss Life pins its hopes on AWD Group…
Canada’s health care cost burden grows…
Hedging has saved US insurers billions
Hedging strategies applied by US life insurers to protect
themselves against losses on variable annuities (VA) with
guarantees have proved highly effective during periods of extreme
market volatility, reveals a study conducted by consultancy and
actuarial services company Milliman.
Based on an analysis of the effectiveness of hedging strategies
of its internal clients during September and October 2008 Milliman
found that VA hedging programmes had been 93 percent effective.
Milliman estimates that on an industry-wide basis this resulted in
the saving of $40 billion in assets of insurers.
“Since the last severe market downturn in 2001 many insurers
have developed more robust guarantee hedging programmes that are
built to provide substantial protection against severe market
declines,” said Ken Mungan, head of Milliman’s financial risk
He added that the hedging programmes are comparatively simple
compared to the complex structured financial products which sparked
the financial crisis.
In conclusion, Mungan said success of the hedging programmes is
likely to spur further innovation by VA writers and other financial
product companies seeking to protect themselves against market
Aegon opts out of participation in TARP
In a sudden about turn Dutch insurer Aegon has announced that
its US unit Transamerica has withdrawn its application for
participation in the US federal government’s Troubled Asset Relief
Program (TARP). Announced in October 2008, the TARP was instituted
to buy equity stakes in banks in need of financial assistance.
To qualify to participate in the TARP a number of life insurers
announced acquisitions of savings and loan institutions, better
known as thrifts, which are regulated by the Office of Thrift
Supervision (OTS) and fall within the definition of banks.
Transamerica applied to acquire Suburban Federal Savings Bank.
In a brief statement on its decision not to pursue the TARP,
Aegon’s chief financial officer Jos Streppel commented: “The
ongoing steps we are taking have positioned Aegon to enter 2009
with a strong capital position.”
Aegon has also withdrawn its application to the OTS to gain a
SEC snatches control of indexed annuities
Despite strong lobbying spearheaded by the National Association
of Insurance Commissioners (NAIC), the US Securities and Exchange
Commission (SEC) has approved a rule that will enable it to
regulate indexed annuity products as securities with effect from
The SEC’s decision was motivated by its view that individuals
who purchase indexed annuities are exposed to “a significant
investment risk” in the form of volatility of an underlying
“Insurance companies have successfully utilised this investment
feature, which appeals to purchasers not on the usual insurance
basis of stability and security, but on the prospect of investment
growth,” emphasised the SEC
The SEC’s decision received a cold welcome from the NAIC which
views it as a “challenge” to state insurance regulatory
“We are very dismayed the SEC chose to ignore thousands of
comment letters opposing this rule,” said NAIC vice-president and
Iowa Insurance Commissioner Susan Voss.
“The states have a demonstrated record of consumer protection,
and we do not believe this rule is in the best interest of
insurance consumers,” she stressed.
According to the SEC, some $123 billion is currently invested in
Regulators seek closer global co-operation
The New York State Insurance Department (NYSID) and the UK’s
Financial Services Authority (FSA) have signed a memorandum of
understanding (MoU) establishing a formal basis for consultation,
co-operation and co-ordination.
The MoU is the fourth such MoU initiated by the NYSID in 2008.
Other regulators involved are Germany’s Bundesanstalt für
Finanzdienstleistungsaufsicht, the Bermuda Monetary Authority,
France’s Autorité de Contrôle des Assurances et des Mutuelles and
Taiwan’s Financial Supervisory Commission.
“The FSA and the Department have demonstrated, most recently
through our work on monolines and during the current financial
crisis, that international co-operation is essential to protect
policyholders and provide the security that is fundamental to the
industry’s success,” commented the NYSID’s superintendent Eric
Entities regulated by the NYSID have assets under management in
excess of $4 trillion.
Swiss Re bolsters life reinsurance capacity
Sensing what it termed “significant opportunities”, Swiss Re has
bolstered its life reinsurance capacity in the form of a $1.5
billion letter of credit (LoC) facility extended to it by US
investment bank JPMorgan. The LoC matures in 2028 and has a pricing
rest feature after the first 10 years.
“Notwithstanding the difficult capital market environment, we
have concluded an attractive, long-term arrangement with JPMorgan
which will further enhance our position to be able to benefit from
opportunities that arise from the current market environment,”
commented Swiss Re CEO Jacques Aigrain.
“Clients turn to us as they look for a very strong counterparty
in terms of superior capital and liquidity – and we are responding
accordingly,” he added.
Swiss Re noted that the LoC facility replaces and expands
arrangements it now has in place required to meet US regulatory
requirements for its life business.
Indicative of opportunities, US insurer The Phoenix Companies
(TPC) announced on 31 December that it had entered into a
reinsurance deal with a Swiss Re unit Reassure America Life
Insurance Company involving a block of TPC’s life insurance
Beyond stating that the deal was aimed at improving TPC’s
capital position, no details were released.
IBM lands £200m Friends Provident deal
As part of its drive to trim annual costs by £40 million ($60
million) by the end of 2009, UK life insurer Friends Provident is
to outsource management of its information technology systems to
The contract, which extends for 10 years, is worth a total of
£200 million to the US technology giant and is aimed at achieving
initial annual savings of £6 million.
The outsourcing deal includes every aspect of the insurer’s
technology infrastructure including software, hardware and services
and the opportunity for all hardware to be updated. In addition,
Friends Provident will in future have the ability access mainframe
capacity on demand from IBM via the internet, a concept that has
become to be referred to as cloud computing.
“By partnering with IBM, one of the world’s leading technology
providers, we will gain access to the latest processing power and
the expertise to improve our service and technology further,”
commented Friends Provident’s CEO Trevor Matthews.
ABI proposes external actuarial reviews
The Association of British Insurers (ABI) has launched a
consultation on proposed guidance for life insurers on when
internally sourced actuarial advice should be subject to external
The ABI outlined that under its proposed guidance an external
review of internal actuarial advice should happen when advice:
• Influences decisions that can result in significant changes in
the running of life insurance policies and, thus, policyholder
• Affects the decision to enter into and/or the price paid in
• Is critical to the implementation of material new regulatory
or equivalent requirements; and
• Is provided in an area where the insurer’s governing body is
aware that industry practice may have developed significantly since
the last advice was obtained.
Responses to the ABI’s proposed guidance are due by 31 March
2009. The ABI’s guidance will be issued in July 2009 and will apply
from 30 September 2009.
ING bows to consumer groups’ pressure
ING has reached an agreement with Dutch consumer organisations
Verliespolis and Woekerpolis resolving a dispute related to cost
charges to individual universal life insurance products sold to
customers in the Netherlands.
Under terms of agreement ING’s Dutch insurance subsidiaries will
offer compensation to policyholders where individual universal life
policies have a cost charge in excess of an agreed maximum.
ING estimates that the cost of the settlement will total €365
million ($475 million), provision for which was made in the third
quarter of 2007.
ING’s settlement follows a similar agreement reached by Delta
Lloyd Group (DLG), the Netherlands unit of UK insurer Aviva, with
the consumer organisations in September 2008 under which DLG agreed
to compensate 200,000 aggrieved unit-linked policyholders. The
adverse impact of the agreement on DLG’s embedded value is expected
to be about €300 million before tax.
US insurer ventures into Albania
In an open bid process, the Albanian Ministry of Finance (AMF)
has accepted American Reserve Life Insurance’s (ARLI) offer of €25
million ($32 million) to acquire a 61 percent stake in state-owned
composite insurer INSIG. The remaining 39 percent of INSIG’s issued
capital is owned equally by the World Bank’s International
Financial Corporation and the European Bank for Reconstruction and
INSIG was established in 1991 as a state-owned monopoly, a
privileged position it lost 1999 when a decision was made by
Albania’s government to open the market to private insurers. INSIG,
which ranks as Albania’s second-largest life insurer and
third-largest general insurer, operates in Albania, Kosova and
According to the AMF, INSIG recorded total revenue of €17
million in 2007 and net earnings of €1.8 million. INSIG ended 2007
with total assets of €50 million.
Established in 1922, Texas-based ARLI is a wholly-owned unit of
Heritage Guaranty Holdings, a privately owned company that also
controls Liberty Bankers Life, Mid-Continent Preferred Life and
US third-quarter life sales take a big hit
Plunging equity prices took a heavy toll on sales of variable
life insurance products in the US in the third quarter of 2008,
reveals data produced by research and consulting organisation LIMRA
Suffering the most damage were variable life (VL) products,
which saw sales based on annualised premium income plummet 41
percent compared with the third quarter of 2007.
During the first three quarters of 2008 VL sales were down 29
percent compared with the same period in 2007.
Almost as bad were variable universal life sales, which fell 33
percent in the third quarter of 2008 and 17 percent in the first
three quarters of the year.
The third quarter saw positive growth in only one product-class
– whole life, with sales up 7 percent compared with the third
quarter of 2007 and 4 percent up during the first three quarters of
This was, however, not enough to prevent total life sales in the
third quarter falling by 11 percent and sales in the first three
quarters by 4 percent.
Swiss Life pins its hopes on AWD Group
Despite having its growth targets mauled by events in financial
markets in 2008, Swiss Life reiterated at an investors day held in
December that it intends to position itself as “the leading
international life and pensions specialist.”
Switzerland’s largest life insurer is, in particular, pinning
its hopes on its German-based financial advisory unit AWD Holdings
to play a key role in achieving this objective. AWD, in which Swiss
Life acquired a 97 percent stake in 2008 for CHF1.7 billion ($1.5
billion), is tasked with increasing sales revenues to €1 billion
($1,3 billion) by 2012, up 31 percent from the €762 million
reported in 2007.
AWD’s earnings before interest and taxes are forecast to reach
€130 million in 2012, up 54 percent from €84.5 million reported in
According to Swiss Life the major driver of these ambitious
targets will be an increase in the number of AWD’s financial
advisers from the current 6,300 to 8,500 in all its core markets:
Germany, the UK, Switzerland, Austria and five developing markets
in Central and Eastern Europe.
In 2007 AWD reported a total customer base of 1.97 million, of
which it had advised 487,600 during the year.
Royal London unveils international brand
Royal London, the UK’s largest mutual life insurance and pension
company, has unveiled a new brand identity for Scottish Life
International and Scottish Provident International, its two
international businesses, which are due to be combined in 2009.
The two units will be unified under the new banner of Royal
London 360°, which will be based in the Isle of Man, and be
identified by a new red and black logo supported by the slogan ‘You
can count on us’.
Focus of Royal London 360° is on personal investment management
and what the insurer terms “specific investment and tax efficient
products” marketed through intermediaries in markets including the
UK, Germany, the Middle East and South Africa.
As at 30 September 2008, Royal London had 3.5 million customers
and total assets under management of £34.5 billion ($51
SEC report backs fair value accounting
Improve rather than suspend fair value accounting (FVA)
standards is the message that comes from a 211-page report by the
US Securities and Exchange Commission (SEC).
Among the SEC’s key findings was that investors generally
believe FVA increases financial reporting transparency and
facilitates better investment decision-making.
The report also observes that FVA did not appear to play a
meaningful role in US bank failures in 2008.
Rather, the report indicated that bank failures appeared to be
the result of growing probable credit losses, concerns about asset
quality, and in certain cases, eroding lender and investor
The SEC did, however, make eight recommendations aimed at
These included development of additional guidance for
determining fair value when relevant market information is not
available in illiquid or inactive markets and how to determine when
markets become inactive and whether transactions are forced or
US subprime crisis may be far from over
Insurers and banks hoping to recoup all or most of their
unrealised losses on US residential mortgage backed securities may
have to rethink their strategy, suggests a study by the US National
Association of Consumer Bankruptcy Attorneys (NACBA).
Quite simply, foreclosure prevention programmes put in place to
prop up homeowners struggling to meet mortgage repayments are a
failure, according to the NACBA.
The NACBA explained that it reviewed publicly available data
about the reach of the refinancing programmes such as the key Hope
for Homeowners Act passed by Congress in July 2008 on the strength
of forecasts that 400,000 homeowners would be aided.
At the time of publication of the NACBA’s study in mid-December
there had been only 312 applications for assistance under the
The NACBA’s finding came on the heels of a projection from
financial services group Credit Suisse that “over 8 million
foreclosures [are now] expected” over the next four years in the
US. This would account for 16 percent of all mortgages, including
59 percent of all subprime mortgages and 11 percent of all other
The Credit Suisse forecast is up sharply from foreclosures in
the two to six million range cited in previous estimates, noted the
IRDA acts to bolster slumping sales in
In a move aimed at reversing a sharp fall in new business
volumes India’s insurance regulator, the Insurance Regulatory and
Development Authority of India (IRDA), has reduced solvency margin
requirements for unit linked products (ULIPS).
“ULIPS have lost their sheen among investors due to the
volatility in the market,” said the IRDA’s chairman J Hari Narayan
in a statement. “We see a slowdown in growth and the profitability
of insurance companies will be eroded.”
For ULIPS with no guarantee margin requirements have been cut by
20 percent, while for ULIPS with guarantees the reduction is 10
percent. The move is of particular significance for private life
insurers who have traditionally generated more than three-quarters
of new business from ULIP products.
The reduction in ULIP reserve requirements followed a 25 percent
reduction in reserve requirements for traditional life products in
early December 2008.
Easing of reserve requirements followed in the wake of the
latest industry sales data from the IRDA that reflected a 37.6
percent fall in new business between September and October. The 21
private life insurers recorded a 32.6 percent fall in sales to
INR23.04 billion ($475 million) between September and October.
ICICI Prudential, a joint venture between UK insurer Prudential and
Indian bank ICICI Bank, remained top private insurer in October
with sales of INR4.06 billion.
Reinsurers in fine form
The reinsurance industry has remained substantially unscathed by
the turmoil in global capital markets with a capital base still
largely intact and liquid, Willis Re, the reinsurance unit of
insurance broking company Willis Group, asserts in its latest
quarterly renewals review.
A notable finding of the report is that primary insurance
companies facing new capital pressures are increasing their demand
for reinsurance and other reinsurance mechanisms to protect and
enhance their capital positions. This situation places reinsurers
in an “excellent position” to win back market share, observed
Willis Re’s CEO Peter Hearn.
However, reinsurers are acutely aware that access to new capital
in 2009 will become more difficult and expensive.
“As a result, reinsurers are seeking to optimise returns on
existing capital bases via constrained risk appetites and elevated
risk charges,” said Hearn.
India set to ease cap on foreign investment
Following two years of consideration by the cabinet of India’s
coalition government, the United Progressive Alliance (UPA), a bill
that will raise the maximum limit foreign companies can hold in
Indian insurers from 26 percent to 49 percent was presented to the
Rajya Sabha, the upper house of parliament, in the last week of
The bill met with stiff opposition from the Communist Party of
India (CPI), long an opponent of increasing foreign stakes in
Indian financial services companies. Indeed, Indian media reported
that a scuffle broke out between a member of the CPI and a member
of the UPA just prior to the bill’s reading in the Rajya Sabha.
Still subject to assessment by the parliamentary standing
committee on finance, the bill is unlikely to be approved until
after the national election to be held in India in May 2009.
Canada’s health care cost burden grows
In common with countries around the world Canada has long seen
health care costs rise at above the general cost of living. This
year will be no exception with the Canadian Institute for Health
Information (CIHI) forecasting that total health care costs will
rise by 6.4 percent to C$171.9 billion ($144 billion), or C$5,170
The CIHI noted that adjusted for estimated inflation and
population growth, spending is expected to grow by 3.4 percent in
2008, which is similar to adjusted growth rates of recent years:
2.8 percent in 2007, 3.7 percent in 2006 and 2.8 percent in
Since 1997 the public and private sector shares of total health
expenditure have remained relatively stable, with governments
accounting for 70 percent and the private sector, including
privately insured and out-of-pocket expenses, for 30 percent.
The CIHI anticipates that this balance will remain intact in
2008 with public-sector health care spending forecast at C$120.3
billion and private sector spending at C$51.6 billion.