North America

Principle based regulation to favour bigger players

More than 80% of US life insurance chief financial officers favour the transition from formula-based to principles-based regulation for reserves and capital, according to the latest life insurance CFO survey by the Tillinghast business of Towers Perrin. However, only 37% of respondents approve of the way the framework is currently being implemented. Key concerns include misinterpretation from external parties, possible non-standardization across companies and time-consuming calculations. Ninety percent of respondents to the Tillinghast survey anticipate that the new regulations will lead to a greater need to develop hedging programs that respond to the changes, 82% of respondents were concerned about the scope to manipulate the system due to some flexibility allowed in calculating reserves and capital while 81% of respondents were concerned about the lack of comparability of results across companies. Commenting on the survey results Hubert Mueller, a principal partner and survey leader at Tillinghast, noted that the implementation of the proposed principles-based framework were likely to lead to further bifurcation in the US life insurance industry, since larger and more sophisticated companies will have greater resources for analyzing and capitalizing on the new rules. “Important changes will be required in a variety of areas, and those companies that react quickly and decisively will realize significant competitive gain,” it said.