'Banana Skins' poll pinpoints key concerns

[01 June 2011]

The greatest risk facing the insurance industry is the raft of new regulations being introduced simultaneously at international and local levels, according to a new global survey which ranks insurance sector risk.
The CSFI’s latest Insurance Banana Skins survey, conducted in association with PwC, says new rules governing issues, such as solvency and market conduct, could swamp the industry with costs and compliance problems. It could also distract management from the more urgent task of running profitable businesses at a time when the industry is already under stress.

The survey polled nearly 500 insurance practitioners and industry observers in 40 countries (including New Zealand) to find out where they see the greatest risks over the next two-three years. Regulatory risk emerged a clear leader in all major markets, including North America, Europe, Middle East/Asia and the Far East/Pacific. It featured strongly on the list for New Zealand respondents, coming in 2nd.

From a New Zealand perspective

Three issues dominated the Insurance Banana Skins: concern about the state of the economy, the impact of major regulatory reform, and the fall-out from the Christchurch earthquakes, in particular the extent to which this may hurt the industry both in financial and reputational terms through poor claims management.

PwC Financial Services Partner, David Lamb says “insurance is currently a hot topic in New Zealand following the Christchurch earthquakes, with the spotlight on the local insurance industry’s immediate response to a situation that won’t fully play out for some years to come. Insurance contributions are vital to the rebuild of Christchurch in terms of assistance provided to families, local businesses, the community, and the economy as a whole.”

Insurance regulation being noted as a key concern for New Zealand participants isn’t surprising and is in-line with global trends. The days of New Zealand having one of the least regulated insurance markets in the world is over, with the introduction of Insurance Prudential Supervision and Financial Advisor regulatory frameworks.

Mr Lamb says “Consistent with other recent financial market regulation, new insurance regulation has a strong emphasis on director and senior management obligations. It can’t be considered a box ticking exercise; regulatory burden needs to be embedded in the business.”

Although unprecedented challenges are becoming the new normal for the New Zealand insurance sector, New Zealand produced one of the more positive responses to the question regarding how well insurance institutions are prepared to handle key risks identified: no New Zealand respondents thought insurance institutions were poorly prepared, and 13% thought them well prepared, above the global average of only 5% - which it must be said seems alarmingly low.

The Insurance Banana Skins survey also reveals New Zealand is less concerned than other markets about the prospects for investment, interest rates and political risk.

Mr Lamb says “recent events require those in the industry to keep their eye firmly on the ball to successfully manage immediate challenges arising from the Christchurch earthquakes, new regulation, and the economic environment. Those that do so should be able to enhance their reputation and take advantage of a market more informed and welcoming of the benefits of insurance in the years ahead.”

Risk as ranked by NZ participants:

1. Macro-economic trends 10. Management quality 19. Long tail liabilities
2. Regulation 11. Corporate governance 20. Retail sales practices
3. Natural catastrophes 12. Product development 21. Climate change
4. Capital 13. Back office 22. Managing mergers
5. Distribution channels 14. Investment performance 23. Political risk
6. Managing costs 15. Risk management 24. Pollution
7. Talent 16. Interest rates 25. Terrorism
8. Reinsurance 17. Fraud 26. Complex instruments
9. Reputation 18. Actuarial assumptions  


The global perspective

The EU’s Solvency II regulatory directive, due for implementation by the end of this year, was the focus of strongest concern. But the survey also identified new international reporting standards, the UK’s review of retail distribution practices and other tax and regulatory initiatives as swelling an already heavy agenda.

Other high-ranking concerns revealed by the survey include the availability of capital to meet tougher regulatory requirements, and the uncertain state of the world economy and financial markets. These are adding to the pressures for an industry which is being squeezed by low interest rates and intense competition.

A strong rise in this year’s ranking of 26 risks was the incidence of natural catastrophes, a reaction to recent disasters in New Zealand and Japan. Also rising strongly is political risk, a consequence of events in the Arab world, plus growing concerns about the solvency of eurozone countries. A new entrant is the shortage of talent which emerged as a major issue in all regions.

On the other hand, a number of risks have fallen in urgency, among them the use of complex instruments which created difficulties for insurance companies during the financial crisis. The industry’s capacity to manage risk is also seen to have improved.

Despite a high incidence of floods, bombings and oil spills over the last couple of years, concern about climate change, terrorism and pollution risks remains low. These are seen to be manageable underwriting risks, and less threatening to the insurance business than regulatory change.

David Lascelles, survey editor, says. “these results show an industry which is being pressed on many sides at once, and will need skilled management to get through. It is not clear whether new regulation is helping or hindering it.”

David Law, global insurance leader at PwC, says “insurers’ attention has clearly changed with much more focus on how to deal with the increasing regulation they face. This is potentially distracting key resources and talent away from opportunities to grow their business.”

A breakdown of the insurance industry by sector shows the life side specifically concerned about the impact of low interest rates on investment performance, and the task of managing complex and competitive retail distribution networks. On the non-life side, the main concerns are with excess capacity and competitive pricing, along with the impact of surging catastrophe claims. Concerns in the reinsurance sector are mainly with the security of capacity in a highly competitive market.

Insurance Banana Skins 2011 (2009 ranking in brackets):

1. Regulation(5) 10. Interest rates(11) 19. Complex instruments(8)
2. Capital(3) 11. Political risk(18) 20. Climate change(28)
3. Macro-economic trends(4) 12. Actuarial assumptions(9) 21. Reinsurance(20)
4. Investment performance(1) 13. Managing costs(14) 22. Fraud(23)
5. Natural catastrophes(22) 14. Management quality(13) 23. Terrorism(26)
6. Talent(-) 15. Risk management(6) 24. Product development(29)
7. Long tail liabilities(10) 16. Reputation(15) 25. Pollution(34)
8. Corporate goverance(17) 17. Back office(24) 26. Managing mergers(31)
9. Distribution channels(16) 18. Retail sales practices(25)  



Notes to editors:

1. The Insurance Banana Skins survey was conducted in March and April 2011 and is based on 490 responses from 40 countries. The breakdown by type of respondent was:

Life insurance 29
Non-life 29
Composite 11
Reinsurance 6
Brokers 6
Observers 19

2. The survey is the latest in the CSFI’s long-running Banana Skins series on financial risk. Previous Insurance banana Skins surveys were in 2008 and 2009.

3. The CSFI (Centre for the Study of Financial Innovation) is a non-profit think-tank, founded in 1993, which looks at challenges to and opportunities for the financial sector. It has an affiliate organisation in New York, the New York CSFI.