PwC’s Global Insurance Banana Skins 2023 survey for executives of the insurance industries received 589 responses from 39 territories, including life, non-life, reinsurance and brokers. Insurers provided their thoughts on the risks, or ‘banana skins’, facing the industry, against a background of economic uncertainty and heavy regulation. We have set out the key findings below.
The Global Context
Our research indicates insurers around the world face similar risks. New Zealand insurance companies share eight of the top 10 risks with global insurance companies: cyber crime, regulation, climate change, technology, human talent, macro-economy, artificial intelligence and change management. This consistency with the global results demonstrates the long-term changes needed for the industry to address the macroeconomic fall-out from COVID-19, environmental, social and governance (ESG) issues, and workforce-related challenges. It is an exhilarating and challenging time for an industry that is traditionally risk-averse and slow to change. Now, insurers must harness the momentum they have gained to reassess their long-term strategies.
Technology has continued to develop at speed, most notably in artificial intelligence (AI) which was a new risk added to this year’s survey and scored highly on a global scale. This has strong potential to revolutionise the insurance industry and the way we operate. However, the associated risks, such as the opportunity for cyber criminals to target organisations, must be appropriately managed. Cyber crime is the highest rated risk globally for the second year running, highlighting the challenge insurers face to stay ahead of sophisticated criminal enterprises.
“Cyber risk is still in front from a risk point of view. Increased and changing threat levels, and vectors, make this risk very potent and the industry needs to keep adapting.”
The last year’s survey also identifies regulation more broadly as a primary concern for the market, which is likely driven by both the pipeline of regulatory change across the globe and the expanding toolkit regulators are deploying to enforce regulation. Many of the reasons behind this concern are familiar, notably the cost and distraction of compliance, and what is seen as the stifling effect on innovation, product development and competition.
“Excessive, overlapping and sometimes inappropriate or outdated regulation is not a risk, but a reality that burdens companies’ agility, innovation, efficiency, profitability and moreover often deteriorates the customer experience.”
As the survey went out to the market following the hottest month globally since records began, it is unsurprising to see climate change as one of the biggest challenges we face as a global society. This will remain a key focus for Boards, and is expected to continue to increase in severity as a risk.
Top risks identified globally
As part of the survey there are two measures calculated:
Banana Skins Index measures the average score given by each respondent to the 24 risks listed in the survey. It provides an indication on the “anxiety level” of insurers when faced with each of these risks.
Preparedness Index measures the extent that respondents believe the insurance industry is “well prepared” to handle these risks.
The global results indicate that the mood of the global industry has deteriorated slightly, evidenced by a rise in the “anxiety level” recorded within the Banana Skins Index (approximately 3.1 in 2021, 3.2 in 2023). In the survey, New Zealand produced a lower than average score on the Banana Skins Barometer, implying a lower level of risk anxiety. We also produced an above average score on the Preparedness Index, signalling a higher level of preparedness compared to global insurers.
Our view is that this is driven by many of the large risks being known for some time - they are not new risks - and this has allowed insurers to prepare for them. However, we question whether insurers are prepared enough for the severity and dynamic nature of these risks. Complacency with a Kiwi ‘she’ll be right’ attitude can often be mistaken for preparedness.
The New Zealand Perspective
New Zealand’s top risks over the past decade
Over the past few years adapting to change and volatility has become a constant, and this trend continues in 2024. When we last conducted the survey in 2021, New Zealand was beginning to emerge from the pandemic and long term effects were still unknown. Approximately two and a half years on, the acute risks associated with the pandemic are less of a worry. However, there remains a level of uncertainty in the macroeconomic outlook with high inflation and interest rates.
Regulation risk has reached its peak as the top risk for New Zealand respondents. Regulatory compliance costs and customer remediation activities have also resulted in insurers being under the spotlight, which added to reputation risk.
After recent natural hazard events in 2023 and the release of climate reporting standards, it is not surprising that concerns remain around climate change with this risk remaining in the top five for the third survey in a row.
Technology has continued to develop at speed, most notably in AI which was a new risk added to this year’s survey and scored within the top ten. This has the potential to revolutionise the sector and the way insurers operate. However, like all things, it comes with a level of risk such as AI bias, or further increasing the opportunity for cyber criminals to target organisations. Cyber crime and technology continued to rank high within the top risks, highlighting the challenge insurers face to maintain and develop their systems to use new technologies and drive down costs - all whilst trying to stay ahead of sophisticated criminal enterprises.
Top risks: trends
We expand on three of the top five risks from the latest survey - Regulation, Cyber crime and Climate change - including verbatim comments and our views on how insurers can prepare for these risks below.
Regulation is now the greatest risk
While globally, insurers are concerned that increased regulation is hampering product innovation and competition, in New Zealand the concern is more around the sheer volume of upcoming change, and the accompanying cost. As one New Zealand respondent commented “Regulation has been increasing, and whilst with good intent to look after customers, impacts the resourcing and complexity of the business to manage multiple requirements from different regulators. This is affecting the costs for customers and sometimes leads to longer calls and customer frustration.”
Regulatory changes impacting insurers in recent years have included the Financial Services Legislation Amendment Act 2019 (FSLAA), new accounting standard for insurance contracts (NZ IFRS 17), the Financial Markets (Conduct of Financial Institutions) Amendment Act 2022 (CoFI), the Interim Solvency Standard (ISS) and the ongoing review of the Insurance (Prudential Supervision) Act (IPSA) 2010. This has resulted in large compliance projects given the complexity and change needed for insurers. The task of addressing and implementing new regulatory standards, in the mandated time frames, has proven to be a challenge for insurers. This is likely to continue in the short to medium term, although the new coalition Government is considering relief in a few targeted areas.
- Prudential regulation
- Conduct and culture
- The link to reputation risk
Prudential regulation
The IPSA review and the ISS are interconnected as IPSA is the piece of legislation that gives the RBNZ power to regulate the sector and issue a set of solvency standards.
In terms of IPSA, the RBNZ has carried out seven consultations so far and is likely to start drafting a bill that will take effect around 2026. Proposed changes are to introduce a ‘ladder of intervention’, onsite inspection powers, additional risk and governance standards and the ability for the RBNZ’s actuaries to override the insurers actuaries calculations in respect of solvency. In addition, yearly renewable term life policies may no longer be in a statutory fund, which could increase capital requirements for life insurers.
As for the ISS, it was necessary to implement changes to solvency to operate in a post IFRS 17 environment and it is clear that the solvency calculation now breaks the link from insurance accounting. This generally works well for most insurers, but teething problems have resulted from merging life and non-life standards together. A second amendment to the ISS is currently being drafted by the RBNZ to address some of the industry’s concerns and we expect a new amended ISS to be available at the end of 2024 and effective for balance dates in 2025.
Further changes to regulatory capital and solvency calculations are expected in coming years, as the RBNZ looks to consult on recalibration of specific capital charges with the aim of introducing a new final standard around 2026 to achieve alignment with changes in IPSA provisions (including the new ladder of intervention where regulatory actions are increasingly intensive as insurers fall down the solvency ‘ladder’). We expect that the regulatory capital calculations for New Zealand insurers will be much more aligned to Solvency II in Europe in the future, which may provide some capital relief to life insurers, but is likely to increase complexity in calculations for all insurers.
Conduct and culture
In June 2022, the New Zealand Government passed the Financial Markets (Conduct of Financial Institutions) Amendment Act (CoFI), introducing a new legislative framework to regulate the conduct of financial institutions and their intermediaries. It addresses concerns raised in the RBNZ and FMA thematic reviews into conduct and culture in New Zealand’s retail banks in 2018, and life insurers in 2019. Our summary from last year looks at key changes outlined by the new CoFI regime and answers what the insurance sector should be doing to prepare.
During the 2023 New Zealand government election, there was some uncertainty as to where regulatory reforms related to conduct will head. In late January 2024, the new coalition Government confirmed the following direction of travel:
The Government is looking to simplify Conduct licencing potentially with a single licence. As a result, supervision for the Consumer Credit Contracts and Finance Act (CCCFA) will shift from the Commerce Commission to the FMA.
CCCFA will be rewritten to protect vulnerable customers without limiting access to credit.
There is confirmation that CoFI will not be discarded but there will be a targeted review of obligations. The Government ‘acknowledges the positive general framework' in respect of ensuring consumers are protected from poor conduct of financial institutions.
We believe the industry will be encouraged by this announcement and can proceed with confidence in their CoFI implementation programmes. While changes to the CCCFA primarily relate to banks and non-bank lenders, increasing supply of credit generally has positive effects for the insurance industry.
The link to reputation risk
Maintaining trust with consumers is paramount for insurers, but reputation risk has risen back into the top five risks facing the New Zealand insurance industry. In previous years, reputation risk has appeared as one of the top risks for New Zealand insurers following the response to the Canterbury Earthquakes and the RBNZ and FMA thematic reviews into conduct and culture.
However, in the latest survey, it is clear that New Zealand insurers view reputation risk as higher, as a result of the messaging that has been communicated regarding mistakes committed by insurers. While the majority of errors in insurers operations are self-identified and have either undergone or are currently undergoing expensive remediation to compensate affected customers, one New Zealand respondent commented, “Regulators have had a focus on ensuring that errors are corrected, which is appropriate, but the messaging and quantum of penalties may lead to a negative reputation of the industry.”
Cyber crime and technology risk continues to be high
The concern about cyber crime for insurers has grown rapidly locally and globally. A major theme of the latest survey was the growing sophistication of cyber attacks, as hackers and other criminals use a wide variety of methods to break into IT systems to exploit vulnerabilities in insurers defences. There were also fears that artificial intelligence can be used as a powerful new weapon to breach insurers security. Can the insurance industry keep up with all of these threats?
- Attacks on insurers technology systems
- Use of generative AIs (GenAI) and cyber crime attacks
Attacks on insurers technology systems
As insurers businesses become more complex, with new hardware, cloud computing and third-party services in longer supply chains, cyber vulnerabilities unfortunately increase. Criminals are also becoming more adept at monetising their breaches. As the chief risk officer at a life insurer in Hong Kong noted, “The process and governance requirements of insurance make it difficult to access funds in itself, but there is an increasing cyber risk as insurers have a wealth of sensitive data that bad actors find valuable.”
With the prospect of sensitive customer data leaks, the insurance sector’s ability to be resilient to cyber-attacks has become a core requirement, with cyber security being less an 'add on' and something to be designed into the business and IT architecture. On top of the potential damage caused by cyber crime, a concern was that the costs of attempting to mitigate these risks are becoming prohibitive. Investing in defences is seen as more difficult and expensive as the IT ecosystem around the insurance industry expands, with the increased reliance on cloud and third-party services.
Use of generative AIs (GenAI) and cyber crime attacks
The insurance industry deals with sensitive personal and financial information. The adoption of generative AI introduces significant potential to streamline and simplify some existing processes to allow insurers to spend more time on analysing results and progressing actions rather than crunching data and summarising information into insights.
We are seeing insurers start small in the use of GenAI technologies with use cases in building a simple chatbot to access insights from the email inbox of a key person that left the business, right through to playing a fundamental role in writing code to build models for experience investigations that can save an analyst multiple weeks of work. According to PwC’s Global CEO Survey 2024, 28% of insurance CEOs surveyed expect that GenAI will decrease their headcount by 5% or more in 2024.
However, the immediate GenAI opportunities are tempered by potential vulnerabilities to data breaches and unauthorised access. Specifically, the use of generally available GenAI tools such as ChatGPT requires input of information from the user, which is then available to the tool. This means that the insurance industry cannot use these tools unless they are careful to anonymise the data submitted in their requests. Many firms that wish to benefit from GenAI are working to develop their own, in-house GenAI tools that draw from publicly available data but do not share the firm’s information outside their own IT systems. Insurers will be doing the same.
Other privacy-related trends in Europe are also emerging, which complicate the long-term use of sensitive health data in models and GenAI tools. This is a further consideration for insurers to ensure the development of GenAI capabilities can be flexible enough to accommodate future changes to regulation.
“Cyber risk is only going to increase as use of AI increases and can be used to mimic real people,” said the senior vice president of an actuary department at a US life insurance company. This means cyber criminals could use AI to defeat and bypass existing cyber defence capabilities of organisations. Insurance companies will need to constantly enhance their cybersecurity strategy, defence mechanism and governance regime to be cyber-resilient.
The risks of climate change are front of mind
This risk is related to the impact on the insurance industry’s profitability and operations caused by climate change (including operational, asset and underwriting risks). As one New Zealand respondent commented, “[A main risk to the industry is the] increasing scale and breadth of catastrophe risks and associated impact on reinsurance markets. An increase in risks/perils being made uninsurable could undermine the industry’s ability to adequately support communities.”
Since the last survey, significant weather events took place in New Zealand, with the Auckland floods in January 2023 and Cyclone Gabrielle in early February 2023. The events were more severe than any other events in recent history, with Cyclone Gabrielle being the costliest non-earthquake event that New Zealand has ever experienced. This would have been front of mind for respondents when completing the survey. Similar to the Caterbury earthquake events in 2010 and 2011, reinstatement work takes time and currently costs more in a high inflationary environment. These factors are contributing to significant increases in the cost of reinsurance for insurers, which will have to be passed onto customers.
The risks posed by climate change cannot be ignored any longer with increasing obligations in respect of climate related disclosures. Aotearoa climate reporting standards issued by the External Reporting Board are now effective for all large insurers ($250 million annual premium income or greater). Not all insurers are equal when it comes to reporting on climate risk - it is obviously fundamental to the business of a property insurer as it affects the risks they insure, but it is more focused on the asset side of the balance sheet for life and health insurers. With net zero commitments being made globally, the insurance sector has an impact on communities in terms of sending signals for sustainable behaviour.
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