Posted on 23 Feb 2009
PricewaterhouseCoopers L.L.P has released its second Insurance Banana Skins survey reflecting how much the industry landscape has changed over the last 18 months. The survey questioned insurers on three areas: current risks, future trends, and their preparedness to respond to the risk environment. With 403 insurers and industry observers responding from 39 countries at a difficult time for financial services, the survey reflects significant change in how risks are perceived and prioritized.
In 2007, the top fears were over-regulation and natural catastrophes. Today, according to the survey, top concerns are about investment performance, equities and capital availability, all connected with the fall-out from the credit crunch, and its impact on the strength and profitability of the insurance industry. Here is a summary of the top concerns as garnered from the survey:
The ability of insurance companies to get through the crisis depends above all on their investment performance (placed No 1 in the survey), i.e. achieving sufficient returns to protect capital, remain profitable and meet commitments to customers. Key here are the equity markets (No 2 on the list) on which the industry will depend heavily for income if, as expected, the crisis produces a fall-off in insurance business and a surge in claims. An extended period of extra low interest rates (No 11 on the list) would also hurt income and reduce the appeal of savings products.
The resulting squeeze on profitability could affect the industry’s solvency, making capital availability (No 3 on the list of concerns) a key consideration in the period ahead.
The scale of financial market disruption will depend on macro-economic trends (No 4) about which the majority of respondents to the survey were gloomy, particularly those in North America.
The risk of too much regulation (No 5 on the list of concerns) has fallen from the top position it occupied in the last survey. But it has not disappeared, only been overtaken by more urgent issues. There is now widespread concern that the crisis will trigger a regulatory crackdown on the financial sector which will put pressure on the insurance industry to increase capital and take on more compliance costs at a time when resources are very stretched. The insurance sector feels that it may be unjustly penalised for the sins of the banking sector.
The next set of risks is linked to the industry’s ability to manage its way through the
crisis and avoid unnecessary losses. Concern about the strength of the industry’s risk management techniques (No 6) has risen sharply in the wake of the crisis at AIG and revelations about insurance companies’ exposure to complex instruments, specially those in the credit insurance market. The security of reinsurance arrangements is a fast-growing concern with worries about the capacity of the reinsurance sector to meet a surge in claims on risks that have been laid off by primary insurers.
Profitability on the non-life side of the industry will depend heavily on the pricing
cycle (No 12 on the list). Insurers are hoping that a capacity shake-out will enable them to push up rates, but the contrary view holds that insurance business will fall away as clients seek to cut costs. reinsurance sector is a rising concern (No 8), specially those in the credit insurance market. The security of reinsurance arrangements (No 7) is a fast-growing concern with worries about the capacity of the reinsurance sector to meet a surge in claims on risks that have been laid off by primary insurers.
A growing concern is potential damage to the insurance industry’s reputation (No 15) caused by insurers’ attempts to push up premiums and take a tougher line on insurance claims, as well as disappointing returns on savings products. The industry expects to see an increase in fraud (No 23), a common reaction to hard times. Corporate governance risks (No 17) are also expected to grow as companies come under greater pressure to deliver results.
The survey showed a striking fall in concern about environmental issues. Natural catastrophes fell from No 2 last time to No 22, possibly because of fewer major recent events. Climate change also dropped sharply, from No 4 to No 28, reflecting a sense of declining urgency about the issue. Pollution risks eased noticeably, from No 21 to No 34.
Concerns about structural change to the insurance industry were also less prominent. The threat of new competitors fell from No 10 to No 32 because respondents felt the insurance market had become less attractive. Similarly, the prospect of mergers remained low at No 31.
Types of respondents: The survey showed a striking similarity between the top level concerns of the life, non-life and reinsurance sectors: all of them focused on financial market issues. However, lower down there were differences of emphasis.