Press Releases

UK – December 29, 2008

The challenges for 2009

Philip Brook, global head of insurance consulting at Watson Wyatt, said:

"2009 is going to be a challenging year for the insurance industry. Many companies will face falling demand from retail customers due to the recession coupled with concerns over the future performance of stock markets. Some product designs will look expensive due to the increased costs of guarantees resulting from low interest rates and continued high levels of volatility. Insurers' balance sheets have also been significantly weakened. For most companies we can expect less expansionist activity while management looks inward and takes action to repair some of the damage. However, 2009 might turn out to be a very good year for those insurers with relatively strong balance sheets and access to capital who are able to take advantage of current market conditions and acquire distressed companies at low prices."

Transactions

Craig Buck, US head of insurance consulting at Watson Wyatt, said:

“M&A activity may well increase as companies begin to line up as either buyers or sellers. The current economic environment affords companies an unprecedented opportunity to implement long-term strategic objectives on a highly accelerated basis. For companies with capital to spend this could mean significant expansion into new territories, products and markets via one or two key acquisitions. For companies seeking to refocus on core operations, there is an opportunity to restructure the business model in short order. In either case, we anticipate some organisations will undergo major transformations in the coming year.”

Risk management

Martin Pike, European head of insurance consulting at Watson Wyatt, said:

“The economic crisis has demonstrated the price of weak risk management in some organisations, but it has also provided clear evidence of the power of positive, dynamic and embedded risk and value management. 2009 will see increased attention being paid to the strength of risk governance arrangements, and greater scrutiny of risk models. At the same time companies will want to take advantage of the market opportunities that arise from the weakness of some competitors, and acquisitions and growth strategies will need to be judged carefully against a well articulated risk appetite.”
.
Mark Chaplin, global head of risk and value consulting services for insurers at Watson Wyatt, said:

“Insurers will seek to repair or strengthen balance sheets through risk reduction/hedging and releasing or raising capital. However, continued capital constraints on banks and a widespread aversion to counterparty risk will necessitate the development of innovative solutions and require close attention to understanding the residual risks.”

“Many insurers will also seek to cut costs but will have to balance this against a need to improve risk management capabilities and, in particular, management information systems as managers, investors and supervisors demand more frequent, detailed and accurate updates.”

Regulatory reform

Richard Holloway, Asia Pacific head of insurance consulting at Watson Wyatt, said:

“Regulators are becoming more aware of the challenges of regulating in a dynamic environment. In 2009 they will continue to make fresh assessments of the risk management capabilities of local and international insurers and their ability to meet rising capital infusion requirements of insurance operations.”

Craig Buck, US head of insurance consulting at Watson Wyatt, said:

“The economic crisis has turned a spotlight on the need for a more robust reporting and regulatory system. In some cases, reforms were already being proposed or implemented. As a result of the crisis, we are likely to see modifications to the proposed changes based on the lessons learned, while at the same time the emphasis on adoption and implementation of new methodologies is likely to increase.”

Martin Pike, European head of insurance consulting at Watson Wyatt, said:

“2009 will be a critical year for European regulatory reform. 2008 closes with disagreement between the various representatives of the Member States over key elements of the Solvency II initiative and we believe that these issues must be resolved quickly. We see a strong, flexible and risk-sensitive regulatory regime as essential to the efficient functioning of the insurance markets and believe that such a regime can provide a firm foundation for the more proactive insurers to add considerable value to their businesses through better risk management.”

Products, pricing and distribution

Craig Buck, US head of insurance consulting at Watson Wyatt, said:

“The economic crisis has caused increased concerns about the variable annuity market. Variable annuities are often sold with riders that guarantee a minimum level of market performance. The collapse in equity markets has reduced the fee income on these products but at the same time the cost of the guarantees provided has increased. The associated increase in capital requirements and the financial stresses of some large providers casts a shadow of doubt on the short-term performance of these products. Although we would expect increased consumer demand for the protection afforded by these guarantees, concern over the short-term stability of equity markets and the financial viability of providers may contribute to a move to fixed products. As the industry becomes more focused on direct reflection of risk in pricing, we would expect to see more discipline in pricing – including increased prices and more limitations imposed on these benefits – regardless of the implication on sales.”

Richard Holloway, Asia Pacific head of insurance consulting at Watson Wyatt, said:

“Asian insurers’ own investments have largely escaped unscathed compared with those in the US and Europe because of their portfolios’ limited exposure to foreign entities. Most insurers in Asia have confined investments to debt instruments and equity exposure in local markets.

“However, as equity prices have nose-dived and unit-linked fund values have fallen dramatically, the industry in Asia faces a tougher year for the sales of unit-linked products.”

Mark Chaplin, global head of risk and value consulting services for insurers at Watson Wyatt, said:

“Declines in savings by policyholders and, in some cases, net outflows from life insurance companies plus increased claims under income protection policies as a result of worsening economic conditions will result in an ongoing strain on weaker insurers, increased customer segmentation, more dynamic pricing models and ever more intense competition for distribution.”

Graham Fulcher, senior non-life insurance consultant at Watson Wyatt, said:

“The personal lines market will have to deal with the increasing prominence of aggregator websites and their move into other markets and other lines away from their initial rise in UK motor and household.”

“Companies face an uncertain claims environment with the negative impact of increased claims from the recession and the financial market turbulence possibly being offset by price deflation. The fall-out of the credit crunch – including its impact on some prominent insurers – has stalled and in some cases reversed the soft market in commercial lines pricing. We see a growing need for companies in this market to develop more sophisticated pricing techniques.”

For more information please contact:

Bruce Wraight
Head of Public Relations, Europe
Watson Wyatt
+44 (0) 1737 273370
+44 (0) 7771 765154
bruce.wraight@watsonwyatt.com

Visit Watson Wyatt's online press office: www.watsonwyatt.com/europe/news/journalists

Watson Wyatt Worldwide
Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,600 associates in 32 countries and is located on the web at www.watsonwyatt.com

Watson Wyatt's Insurance & Financial Services Consulting Practice Watson Wyatt's Insurance and Financial Services practice is a leading provider of actuarial and business consultancy to financial services organisations worldwide. With over 360 consultants in 17 countries, the firm combines local market knowledge and global best practice to advise on all aspects of financial management including risk and capital modelling, regulatory matters, pricing, reserving, mergers & acquisitions and strategy. It provides these services to a wide range of organisations including life, non-life and health insurance companies, reinsurers, regulators and investment banks. In addition to these services it is one of the market leading actuarial and financial modelling software providers with systems including VIPitech and Pretium.