Economic Environment is the Top Challenge Facing Life Insurance Companies in 2003: Tillinghast CFO Survey

Few are Well Prepared to Meet These Challenges

New York, NY, February 03, 2003 — Lackluster performance in the U.S. economy is making it difficult for life insurance Chief Financial Officers (CFOs) to achieve their company growth, profit and risk objectives, according to a recent Tillinghast – Towers Perrin (Tillinghast) survey. The majority (63%) of CFOs believe the economic environment is their top impediment, and nearly 90% rank the economy among their top three challenges. Only 23% of CFOs feel well prepared to address this challenge.

“CFOs — and their companies — are expected to perform in a very complex environment, with lower profit margins, increased competition from unconventional sources, advancing technology, evolving distribution systems and increased regulator and investor scrutiny,” said Rick Berry, Tillinghast Principal. “The weak economic environment exacerbates these challenges as CFOs begin 2003.”

Respondents also cite the competitive environment (50%), expense and cost management (47%) and distribution effectiveness and efficiency (47%) as top concerns. They believe their companies are more prepared to respond to distribution-related challenges (50% well prepared) and expense and cost management challenges (43%), while being less able to respond to regulatory and legislative challenges (17%) and the economic environment (23%).

Obstacles to preparedness include the difficulty of integrating cross-functional or cross-business efforts and resources, ineffective decision-making, inadequate control of distribution channels and reduced access to capital. Companies are taking action to respond to the challenges facing their companies. Sixty percent are working to improve their financial discipline, including risk and capital management practices. Fifty-seven percent report that they are reducing operating expenses.

Respondents indicate that they are also modifying their business strategies by refining their marketing and distribution strategies. Other life insurers are expanding into new products or markets. Companies are also choosing to invest in improved technology platforms and are working to better leverage their technology investments.

Sarbanes-Oxley: Boon to Enterprise Risk Management (ERM)

Companies are responding to potential regulatory and legislative threats, including the Sarbanes-Oxley Act, by enhancing their ERM practices (53%). Other ways that CFOs are addressing these challenges include participating in industry task groups (43%) and refining business strategies to meet emerging requirements (37%).

“The Sarbanes-Oxley Act significantly increases the responsibility of CEOs and CFOs for attesting to the integrity of their company’s financial statements,” according to Jack Gibson, who manages Tillinghast’s life insurance and financial services sector in North America. “In the face of this increased responsibility, CFOs are enhancing their ERM practices and are making significant demands for more detailed internal management reports and other information from business managers. Their focus is to increase the internal transparency within their organization to reduce the risk of unpleasant surprises.”

The majority of companies surveyed report that they are either directly affected by the Act or are not directly affected but are making/have made changes to comply with the spirit of the Act. Only 13% of companies believe that some or all of the provisions do not apply to them and do not anticipate making any changes at this time.

In response to the Act’s provisions, most companies have already enhanced their enterprise risk management practices (72%) and 60% have changed the nature of their relationship with their audit firm to avoid apparent conflicts of interest. CFOs are also requesting more information and support from business managers (48%) and increasing the amount of information in internal management reports (36%).

Optimism About Growth in Premiums and Revenues in Fourth Quarter 2002

Following the recent economic turmoil and mixed results to date, respondents expect only moderate growth in fourth-quarter premiums versus the same quarter last year, and little or no growth in revenue and net income. One third of respondents predict an increase of more than 10% in fourth-quarter premiums over the same quarter last year. As a result of lower investment income, only 20% of CFOs predict greater than 10% growth in revenues. Only 17% of respondents expect net income to increase by more than 10% vs the same quarter last year, while 36% of respondents predict a decrease in net income, primarily due to increased asset defaults and lower revenues from equity-based business.

These results reflect CFOs’ outlook at the time they completed the survey and may or may not reflect company performance that actually emerges. CFOs’ views on future financial results for the industry will be a regular feature of the quarterly Tillinghast – Towers Perrin Life Insurance CFO survey and will allow Tillinghast to track the direction of the industry over time.

About the Tillinghast – Towers Perrin North America Life Insurance CFO Survey

The Web-based survey, which was conducted in November 2002, is the third in a series of Tillinghast pulse surveys that explore issues important to the North American life insurance industry and its CFOs. The third survey had a respondent base of 30, or 48% of the program’s 62 registered program members. Respondents primarily include CFOs from large and mid-size North American life insurance companies: 73% were stock companies; 67% had a premium income of $1 billion or more; 27% were multinationals. For more information on the North American Life Insurance CFO program, please contact Michele Bacik, program leader, at 212-309-3921.

About Tillinghast – Towers Perrin

Tillinghast provides actuarial and management consulting to financial services companies and advises other organizations on their self-insurance programs. Tillinghast is a premier independent advisor to the insurance industry; its major clients include most of the world’s top insurers. It operates as one global business, through a network of 42 offices in 20 countries. Tillinghast is a division of Towers Perrin, one of world’s largest management and human resource consulting firms. The Towers Perrin family of businesses also includes Towers Perrin Reinsurance, a leading global reinsurance intermediary. Together, these businesses have over 9,000 employees in 23 countries. More information about Tillinghast is available at