LOMA Conference 1984

iii: Recognizing the growing importance of such life insurance financial management issues as asset/liability management, cash flow forecasting, and managing liquidity, LOMA’s Treasury Operations Committee sponsored a conference, Liquidity, Investments, and Solvency, on October 1-3, 1984 in Chicago.

1: (R. Fred Richardson, President & COO, Hartford Life) These dramatic changes come as a result of the changes in products and services in response to the changed economic environment. It was, in fact, a liquidity matter which first signaled the revolution. This occurred in April 1980, when for the first time in life insurance management experience, our industry had to borrow money from the banks to meet the cash requirements.

As an aside, I subsequently heard a bank speaker gloat that life insurance management would, in the future, have to take advice on management from their bankers. In view of the management record or bankers, we can only hope that this was an inaccurate forecast.

When I joined the insurance industry many years ago, it was a maxim of the business that cash flow would always be positive. Even actuaries who dared to profess that they did not believe in eternal life, did believe in eternal positive cash flow.

2: The investment anti-selection of, and market resistance to the cost of guaranteed cash value insurance are inescapable facts of our time. The investment profits which gave us our gloriously profitable 50’s and 60’s, and saved our bottom line in the inflation of the 70’s, are a thing of the past! We will be working for a fee! Our marketing organization will be marketing our investment management. Our investment performance becomes the product.

3: The most critical areas of treasury and investment operations, with respect to both old and new products, is the matching of assets and liabilities. This is the great weakness of financial institutional structure in the U.S. Our financial institutions are almost all seriously mismatched (Banks, S&L’s, Mortgage Companies, Life Insurance).

The principal cause of this serious problem was our amazing economic stability over almost a century. In a country where interest rates on Manhattan Mortgages did not vary by more than 2% for 86 years (ending in 1962), it was natural that we developed our accounting principles, our financial regulation, our products, and our management policies on the assumption of economic stability.

4: The next mental set that threatens our health is that, “Guaranteed cash values are a fundamental aspect of individual life insurance.” There is no amount of reserve that would make these risks safe, and provide a saleable product!

5: In the future, we must only guarantee that which we can invest properly to do with safety, on a cash matching basis, and at a risk premium which the policyholder will be willing to pay!

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