UK life insurers: improving transparency is the only way forward
Published:02-April-2009
By Datamonitor staff writer
UK life insurers are unlikely to avoid the malaise that has hit the banking sector. Their balance sheets are facing increased scrutiny with concerns that their solvency levels will not be sustainable over the coming months. In order to prepare for this attention, life insurers should practice a degree of damage limitation, making their financial position transparent to investors and customers.
As banks continue to fail, instability in the life insurance sector is being overlooked.
As the reality of many banks' financial standing becomes clear, life insurers are likely to be scrutinized by investors as they too begin to report less than healthy balance sheets. A number of major players have released their 2008 figures in the past few weeks with some showing heavy losses. While no big UK life insurer has collapsed, companies have had to tighten their purse strings after heavy investment losses eroded their capital bases last year. Life insurers may end up having to adopt some of the strategies used by banks to prop up their asset base, such as raising capital through rights issues.
At present, one of the biggest concerns for life insurers is their high number of outstanding guaranteed policies. This means that, regardless of how the market performs, life companies will still be required to pay out a set rate of return to policyholders. The problem is, however, that returns on assets required to pay them are not guaranteed themselves. A general fall in the stock market and government bonds which do not pay out enough are threats that, in due course, will result in reduced asset backing for life companies. This will leave potentially insolvent companies that will need additional capital to absorb further losses.
Policyholders and investors have a natural interest in the highest possible degree of transparency, as it allows them to assess whether life insurers have actively attempted to offset diminishing trust. As a result, life companies must ultimately take a two-pronged strategy to ensure that investor confidence is maintained. Firstly, they must officially disclose their financial position to shareholders and practice effective corporate governance regarding what is revealed in accounts. Secondly, life companies must effectively communicate their financial stability relative to their peers to the man on the street, using three key factors: their ability to operate without external debt; their potential for growth, and the strength of management teams.
Life companies must not underestimate the degree to which ordinary savers are dependent on them and must exercise greater disclosure, admit to losses and regularly communicate their financial position to their customers. Although this will not necessarily prevent the increasingly likely malaise, it should help to maintain customer confidence in the months ahead.
