If life insurance companies take the “back-to-basics” approach to survive, then they may suffer this year, according to industry analysts.

All life insurance companies will be fighting weak earnings and slow growth, as well as the possibility of increased regulatory oversight, according to a new forecast from Ernst & Young.

In that climate, focusing on the basics could be “shortsighted,” Doug French, principal and financial services and insurance & actuarial advisory services leader at Ernst & Young, said in a statement.

“That thinking may be helping insurers survive,” French said. “But to become profitable again and achieve growth, insurance executives are going to have to become more innovative and proactive to change the way they conduct business.”

Peter R. Porrino

Life insurance executives “will continue to face a challenging environment and must focus on improving their current strategies and infrastructures to ensure that they are in line with their business goals and objectives,” said Peter R. Porrino, global director of Ernst & Young’s insurance industry services.

“By focusing on optimizing capital, broadening out risk management capacity and remaining agile in a constantly evolving regulatory environment, life insurance companies will be more prepared for future crises and better positioned once the market rebounds,” Porrino added.

Focal points

Ernst & Young suggests five areas for companies to focus on this year.

First, they must optimize capital in response to ongoing pressures, recognizing that non-traditional capital markets will take years to recover, which may force companies to alter or eliminate products dependent on these sources, according to the forecast. Companies must focus on internally generated sources of capital because investment yields will remain low.  Insurers must strengthen prices for in-force business such as increasing non-guaranteed fees, according to the forecast.

Simultaneously, companies need to develop contingency plans that encompass a wider range of extreme events, including liquidity crises, forced liquidation of assets into frozen secondary markets and limitations on transfers of capital within the enterprise, Ernst & Young suggested.

Life insurers also must build more robust risk management capacity with stronger governance and transparency. To fully realize the benefits of risk management, it will be imperative to establish procedures for communicating and understanding risk-adjusted performance results, especially as chief risk officers appear likely to face increasing demands from regulators and rating agencies on risks assumed and capacity, the analysis said.

They also must focus more on core businesses and readdress product and distribution strategies. As they continue withdrawing from non-core businesses, they will need to conserve capital and reallocate it among those businesses with the best chance of future success.

“This focus will contribute to industry consolidation, so companies must prepare for the new competitive landscape,” the analysis said.

Companies will see enhanced regulatory oversight in 2010 with initiatives such as Solvency II, which applies new reserve and capital adequacy requirements, and new accounting rules, according to the analysis.

The insurers also need to examine areas for reducing costs and seek ways to optimize their operations for a low-growth environment in 2010 that could last several years, Ernst & Young added.