Insurance managers perceive over-regulation as main risk for the market
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DAN IANCU
Partner, Financial Services Leader
PwC ROMANIA
Results of the Insurance Banana Skins 2011 report.
The Insurance Banana skins 2011 report made by PwC and the Centre for the Study of Financial Innovation is a reflection of nowadays concerns of insurance practitioners. Looking in comparison at the past editions of the report, one can have a precise image of the way the recent global economic crisis has shaped the agenda of the insurance sector and has changed substantially the perception on risk of the managers and experts of the insurance sector.
The survey polled nearly 500 insurance practitioners and industry observers in 40 countries to find out where they saw the greatest risks over the next 2-3 years.
The latest edition of the Insurance Banana Skins survey states that new rules governing issues such as solvency requirements, implementation of the International Financial Reporting Standards (IFRS) and of MiFID1 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 EU’s Solvency II Directive on capital requirements for insurance companies, 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 (ranked as no 2 in the Insurance Banana Skins survey) and the uncertain state of the world economy and financial markets, as well as uncertain macro-economic trends (no 3). Closely related is the risk of poor investment performance (no 4) by insurance companies, many of which depend on strong revenues from financial markets to fund their products and compensate for weak sales revenues. But with low interest rates (no 10) and uncertain markets, these cannot be guaranteed. A risk on a substantial rise as compared to previous editions is that related to the occurrence of natural disasters (no 5), in response to the recent earthquakes in New Zeeland and Japan. A new entrant is theshortage of talent (no 6) which emerged as a major issue in all regions, reflecting concern about the industry’s persistent difficultly in attracting – and retaining- high quality staff, a problem that affects the industry the world over, and may be an aspect of the mixed reputation (no 16) it has in many markets.
There are also concerns about the strength of corporate governance in insurance companies (a risk going up from no 17 in 2009 to no 8 in 2011), a perennial issue, but one which has been sharpened by the threat of closer regulatory scrutiny.
Management quality (no 14) remains an issue for some, though the risk has eased from the high position it occupied few years ago.
Also rising strongly is political risk, a consequence of events in the Arab world, plus growing concerns about the solvency of Eurozone countries. A breakdown of life and non-life 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.
This report covers a cyclical downturn in the insurance industry worsened by the global economic recession. Excess capacities on a grand scale, cutthroat pricing and the entry of new suppliers all add to a highly competitive climate.
Although the industry has been able to keep its nose above water by drawing on reserves, this has also put those reserves under closer regulatory and investor scrutiny. Meanwhile, profitability has been squeezed by rising claims, driven by the economic downturn and the recent spate of natural disasters.
A look at the 2007 edition of the Insurance Banana Skins report provides a very interesting angle on the development of concerns of insurance practitioners in the last four years, in terms of risk and elements that clearly have remained at the heart of the insurance business.
The number one banana skin in the 2007 survey was the concern about over-regulation, as a constant headache for the insurance industry. Such misgiving was estimated only to increase over the next few years as insurers face a number of new demands, not least the coming overhaul of financial reporting and capital controls in many parts of the world.
