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Financial Stability, Management of Cat Risks and Demographics Chief Insurance Concerns, Says Geneva Association Exec

Source: A.M. Best

Posted on 24 Jan 2012

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Three key issues will be of significant interest to the global insurance industry in 2012: financial stability, government management of natural catastrophe risk and demographics and old-age security, accord to Patrick Liedtke, secretary general and managing director of the Geneva Association.

In a newly published paper, Liedtke said "no other topic has worried nation states around the world more persistently in 2011 than the question of global financial stability. And with as yet so many unresolved issues, ranging from a reappraisal of the risk-free nature of sovereign debt to significant new regulation and the further strengthening of the global financial system, the topic will remain at the top of the list for 2012 for insurers."

Liedtke warned the "highly complex business" of insurance requires a deep understanding of its workings by regulators who are looking to reform financial oversight in the wake of the global financial crisis.

"Unfortunately, it is also not always well understood by those outside the industry," Liedtke wrote of insurance. "This creates the risk of a misunderstanding of its operations and raises the likelihood of potentially unintended consequences of a particular regulatory action."

Liedtke noted the International Association of Insurance Supervisors has been charged by the Financial Stability Board to deal with "the insurance aspects of the forthcoming regulatory agenda on financial stability. Their expertise in insurance must be recognized in this process and its recommendations to other bodies need to be respected."

The FSB was established to coordinate the efforts of national financial regulatory authorities on an international level.

On the topic of natural catastrophes, Liedtke said as 2011 will be the most-costly year on record for insurers, the role of governments in risk management and preparedness for large-scale disasters has become a major topic of concern. He warned that governments, like companies, must establish comprehensive risk management processes to avoid "social instability and chaos" in the wake of major disasters.

For this effort, Liedtke said the insurance industry has "a significant body of expertise and knowledge" about risk management that could be of help.

Liedtke took a cautious position on climate change, noting the unsettled nature of opinions on its impact. "While the Geneva Association distances itself from endorsing certain studies or specific views on climate change, we do believe that one has to be ready for certain eventualities that many experts consider likely, even if they might occur on a very long time line and with uncertain probabilities," he wrote.

On the topic of demographics, Liedtke noted "the world population is aging, fast." This is becoming problematic as state-sponsored old-age provision is proving uncertain in light of the financial crisis.

He noted state-sponsored systems have not kept up with rapidly changing demographic trends. "Current pension systems are still largely based on the pioneering welfare reforms of German Otto von Bismarck who in 1889 established a pension system that early on fixed the retirement age at 65 years," Liedtke wrote. "This age has only been reconsidered recently and changes are gradual and too painfully slow to provide much relieve for public pension systems. Extrapolating Bismarck's retirement age relative to the average gain in life expectancy of Western European populations, the retirement age today should be somewhere north of 90 years."

Liedtke said private-sector solutions are becoming more important as a means to make up the gap in old-age provision, but some of the "flashier" investment products created in the boom years are not up to the task. "Conversely, life insurance, though often perceived as boring, is gaining in attractiveness," he wrote.