The Association of International Life Offices (AILO) has revealed in its new Capital Management Survey Report which which financial metrics are presenting the biggest challenge.

What happens to life premiums and how they are managed is critical to the outcomes customers demand from product providers and forms the basis of trust on which the sector continues to exist, AILO said in a statement on 27 November.  

‘Capital Management', the subject of the new survey of AILO members, is the collective name given to a range of techniques and tools deployed by life companies to manage the risks associated with these commitments to policyholders.

For life insurers, capital management is a crucial aspect of their overall financial strategy. It involves the allocation and utilisation of financial resources to ensure that insurance companies have adequate capital to cover their obligations and withstand unexpected losses, whilst using that capital efficiently. 

In the case of most AILO members, their insurance operations primarily involve relatively straightforward unit-linked business. Historically, these companies found capital management to be a reasonably simple task under previous solvency regulations. However, the introduction of risk-based solvency frameworks like European Solvency II or Isle of Man Risk-Based Capital has heightened the complexity of capital management. 

The survey, the full results of which are only available to AILO members, sought to identify what capital management tools they are using, the challenges Members have encountered in managing their company's finances and what capital management tools they plan to use over the next three years.

The main findings of this survey are: 

• The greatest capital management challenge highlighted by a majority of respondents, is meeting shareholders' dividend expectations. 

• Traditional reinsurance risk management is used by all respondents to assist in capital management.

• After using these tools, nearly 90% of respondents rated them as somewhat or very effective, with a majority rating them as very effective. 

• Implementing capital management tools can be challenging, with regulatory approval, cost and internal resources highlighted as the most significant challenges to overcome. 

• Two thirds of respondents are not averse to using existing or new tools in the future as circumstances require. 

• The most favoured tools chosen by the insurers surveyed were expense outsourcing, management actions and financial reinsurance. 

The Capital Management Survey Report was compiled by Rob Frize, director at Milliman, an AILO associate member, who said: "I'd like to thank all the AILO Members that contributed to the survey and provided their thoughtful responses.

"The results reveal a useful snapshot on the many and varied techniques being utilised by AILO Members in this key area of cross-border life business.

"The survey indicated a high level of usage of these tools to help with capital management. It also highlighted some of the main challenges insurers face in implementing them and the willingness of AILO Members to considering using the range of tools in the future".

AILO CEO Bob Pain said: "Thank you to Rob for his excellent work, and to all of the Members who participated in this survey. Only through the vehicle of AILO is it possible to obtain such multi-jurisdictional dimension on an issue of such relevance to the cross-border life sector."