Tuesday March 18, 2008
Top 10 risks in insurance
Climate change, longevity, increased competition, and too many rules:
the global insurance industry is facing its biggest challenges yet.
In a recent survey by the Centre for the Study of Financial Innovation
(CSFI) and PricewaterhouseCoopers, 139 industry professionals from 21
countries (including Thailand) were asked to identify their main
concerns over the next two to three years. The top 10 risks identified
were as follows:
1. Too much regulation: The rising burden of regulation emerges as the
greatest risk facing the insurance industry. The steady flow of new
laws and rules is piling costs on to insurance companies, stretching
their resources and diverting management from running the business.
Among the specific concerns were the sheer volume of regulatory
changes, the questionable quality of the regulation, the lack of
consistency in rules, and the EU's new Solvency II capital regime for
insurance.
Similar issues exist for Thailand, as the issuance of the revised
insurance acts in February 2008 will eventually result in the
introduction of a risk-based capital system, which will inevitably be
followed by changes in accounting standards.
2. Natural catastrophes: The sharp rise in catastrophic events, such
as avian flu, tsunamis, hurricanes and floods, put this concern high
on the lists of risks, particularly for the property and casualty, and
reinsurance sectors. The issue is not merely the growing number of
events, but the industry's ability to price the risks and manage
them.
For Thai insurers, there is the continued need to train and retain
local expertise to be able to *****s these risks and ensure
appropriate pricing. The existence of adequate insurance cover is key
to many insurers.
3. Management quality: The perception that insurance management may
not be up to the challenges facing the industry emerged strongly from
the survey. Weaknesses cited by our respondents included poor
adaptability and strategic vision, low calibre personnel, and the
failure of the industry to attract new talent. As with over-
regulation, this concern was geographically widespread, being cited as
a problem in a number of countries, including the UK, the US,
Southeast Asia and Australia.
In Thailand, the lack of qualified personal was specially mentioned by
our respondents, who saw staffing difficulties worsening as the
industry failed to replace an ageing workforce or attract more
qualified people.
4. Climate change: Climate change was the second top concern for the
property and casualty sector, and was seen overall by our respondents
as the fastest rising risk. Aside from the risk of loss, many
respondents focused on the uncertainties surrounding this area, as
well as the quality of the industry's response.
5. Managing the cycle: The ups and downs of the insurance cycle are a
major challenge for the property and casualty, and reinsurance
industries, particularly now that the market is softening again.
Declining premiums, plentiful capital and the possibility of a global
economic downturn all threaten insurance company performance.
6. Distribution channels: The high cost of traditional distribution
channels, and the emergence of new web-based means of selling products
pose risks to established ways of doing business, particularly the
commission-based distribution system in the UK life market. Many
respondents expected to see a big shake-up of distribution
structures.
7. 'Long-tail' liabilities: Long-tail liabilities (claims that
crystallise after a long period) continue to pose a challenge to
insurers, particularly as regards pricing. Some respondents saw this
risk in terms of poorly drawn contracts that allowed liabilities to
drag on.
8. Actuarial assumptions: The industry's adherence to the
pronouncements of actuaries was widely seen not only as the cause of
poor insurance decisions, but also as a sign of its obsolescence.
Several respondents made the point that the accuracy of actuarial
assumptions will become more critical in the period ahead as the
insurance industry enters a softening market.
9. Longevity assumptions: As people live longer, longevity risk for
health care and life insurers is rising. The focus of many responses
was the impact of longer life on the savings side of the business,
annuities and pensions, and insurer's ability to fund their
obligations.
10. New types of competitors: Insurance is under attack from new
competitors on many fronts. On the wholesale side, hedge funds and
venture capitalists are creating new capacity, and investment banks
are inventing new risk management products. On the retail front, banks
are eating into the savings market, supermarkets are selling
insurance, and the internet is providing a platform for electronic
distribution channels and price aggregators (websites that collect and
compare prices).
It is not merely the fact of new competition that causes concerns, but
also its potentially low quality. Many respondents felt new
competitors might fail, causing losses and bringing the industry into
disrepute.
What's ahead? After being asked to identify the risks, the respondents
were asked how well they thought insurance institutions were prepared
to handle them. More than three quarters replied ''mixed'', while 21%
answered ''well'' and 9% answered ''poor''.
Many of these concerns are relevant to the insurance industry in
Thailand and appropriate responses should be developed by both
individual insurers and the regulators.
It is im****tant that the development and implementation of solvency
and re****ting standards that meet international standard are
introduced. This will allow insurance companies to plan for the
changes in systems and processes that enable them to meet the higher
standards, as well as any capital requirements that may be needed.
In conjunction with this, insurers need to ensure that their strategic
objectives are clear and that appropriate KPIs and adequate management
re****ting processes are in place to measure their performance.(The
above re****t is based on the CSFI re****t, in association with
PricewaterhouseCoopers, 'Insurance Banana Skins 2007: the CSFI's
Survey of the Risks Facing Insurers'. To download this re****t, please
visit www.pwc.com)
Noel Ashpole is a director at PricewaterhouseCoopers Mekong, which
comprises of offices in Thailand, Vietnam, Cambodia and Laos. We
welcome your comments at leadingtheway
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