Insurance Banana Skins The CSFI survey of the risks facing insurers. In association with CSFI. Centre for the Study of Financial Innovation

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1 Insurance Banana Skins 2013 The CSFI survey of the risks facing insurers In association with CSFI Centre for the Study of Financial Innovation

2 The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 to look at future developments in the international financial field particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a belief in open markets. Trustees Sir Brian Pearse (Chairman) David Lascelles Sir David Bell Robin Monro-Davies Sir Malcolm Williamson Staff Director Andrew Hilton Co-Director Jane Fuller Senior Fellow David Lascelles Programme Coordinator Lisa Moyle Governing Council Sir Malcolm Williamson (Chairman) Sir David Bell Geoffrey Bell Rudi Bogni Philip Brown Bill Dalton Sir David Davies Abdullah El-Kuwaiz Prof Charles Goodhart John Heimann John Hitchins Rene Karsenti Henry Kaufman Sir Andrew Large David Lascelles Robin Monro-Davies Rick Murray John Plender David Potter Mark Robson David Rule Sir Brian Williamson Peter Wilson-Smith Minos Zombanakis CSFI publications can be purchased through our website or by calling the Centre on +44 (0) Published by Centre for the Study of Financial Innovation (CSFI) Web: ISBN: Printed in the United Kingdom by Heron Dawson & Sawyer CSFI / New York CSFI Web:

3 C S F I / New York CSFI Insurance Banana Skins Draft for PwC June Insurance Banana Skins Draft for PwC June NUMBER ONE HUNDRED AND TWELVE JULY 2013 Preface Preface One is always a bit suspicious when financial institutions (be they banks or insurers, or even hedge funds) complain about the allegedly intolerable burden of regulation. A cynic might (mis)quote Mandy Rice-Davies: They would, wouldn t they? And yet, they may have a point. This is the second year in a row that the burden of One regulation is always has emerged a bit suspicious as the top when risk financial our survey institutions of Insurance (be they Banana banks Skins. or insurers, Anyone or who even has hedge tried funds) to wade complain through about the details the allegedly of the Commission s intolerable burden Solvency of regulation. 2 proposal A cynic and who might has (mis)quote followed its Mandy painful Rice-Davies: process through They the would, Brussels wouldn t sausage they? machine And yet, must they have may some have sympathy a point. This with is the second insurers, year who in are a row having that the to cope burden with of it regulation top of has too many emerged other as European the top risk and in local our survey regulatory of Insurance initiatives. Banana Skins. Anyone who has tried to wade through the details of the Commission s Solvency 2 proposal and who has followed its painful process It is through all too the easy Brussels for managements sausage machine to succumb must to a have tick-box some sympathy mentality, with which the will insurers, blind them who are to the having real risks to cope their with industry it on top faces, of too or to many spend other so much European time and meeting local regulatory demands initiatives. that business opportunities go by the board. In that sense, bad regulation (or over-regulation) can really be a threat and that is clearly how it is perceived It is all at too the easy present for managements time. to succumb to a tick-box mentality, which will blind them to the real risks their industry faces, or to spend so much time meeting regulatory demands that business opportunities go by the But, board. if the regulatory In that sense, burden bad is regulation perceived (or of over-regulation) as the insurance industry s can really Top be a Risk threat in 2013, and that it isn t clearly alone. how Close it is behind perceived are: at the present time. But, if - the the regulatory poor investment burden is perceived climate (and of as difficult the insurance macroeconomic industry s climate), Top Risk which in 2013, are it making isn t alone. it harder Close behind are: and harder for the life insurance industry, in particular, to make a buck; and - the industry s vulnerability to the chronic problem of dodgy business practices which carry both - reputational the poor investment risk and the climate risk of heavy (and difficult civil penalties. macroeconomic climate), which are making it harder and harder for the life insurance industry, in particular, to make a buck; and And then, of - course, the industry s there are natural vulnerability catastrophes, to the chronic the perennial problem problem of dodgy of business funding guaranteed practices which products carry in both a low interest-rate reputational environment, risk the and quality the risk of of risk heavy management civil penalties. (a big riser this year) It is a daunting list, but one that ought to provide plenty of food for thought at the Board and C-suite level. And then, of course, there are natural catastrophes, the perennial problem of funding guaranteed products in a On low the interest-rate other hand, environment, our Banana Skins the quality survey of also risk reveals management the dogs (a big that riser didn t this bark year) (at least It is a not daunting this year) list, but notably one that the ought availability to provide of capital, plenty of corporate food for governance thought at the and Board human and resources. C-suite level. All of these have plunged so sharply as perceived risks (capital availability, for instance, from number two to 16) that one might be tempted to wonder On the if other they hand, are now our so Banana far out Skins of management s survey also sight reveals that the a nasty dogs accident that didn t is inevitable. bark (at least not this year) notably the availability of capital, corporate governance and human resources. All of these have plunged so This sharply year s as report perceived is (as risks always) (capital a fascinating availability, and for instance, provocative from read. number My two thanks to 16) (again, that one as might always) be to tempted the CSFI s to wonder Senior if Fellow, they are David now so Lascelles, far out of who management s was in charge sight of that the project a nasty and accident who did is inevitable. most of the writing. My thanks also to Keyur Patel, who did much of the legwork (and some of the writing) this year. And, once again, thanks This to year s our good report friends is (as at always) PwC for a fascinating sponsoring and the provocative project while, read. once My again, thanks respecting (again, as our always) editorial the independence. CSFI s Senior Fellow, David Lascelles, who was in charge of the project and who did most of the writing. My thanks also to Keyur Patel, who did much of the legwork (and some of the writing) this year. And, once again, Andrew thanks Hilton our good friends at PwC for sponsoring the project while, once again, respecting our editorial Director independence. CSFI Andrew Hilton Director CSFI This report was written by David Lascelles and Keyur Patel This report was written by David Lascelles and Keyur Patel CSFI / New York CSFI Web:

4 Sponsor s foreword Welcome to Insurance Banana Skins 2013, a biennial survey of the risks facing the industry, which has been produced by the CFSI in association with PwC. We re delighted to be continuing our support for this initiative. The Banana Skins reports provide valuable insights into the risk concerns at the top of the boardroom agenda and how these perceptions change over time. Many of you will be comparing the industry-wide findings against your own assessment of the current and emerging risk environment. Regulation is once again the number one risk. While new capital requirements have been dominating the regulatory agenda as a result of Solvency II and comparable developments elsewhere, consumer protection is now coming back under the spotlight. A clear reflection of this is the rise of poor sales and other conduct of business practices from 18th place in 2011 to fourth in the latest risk ranking. Vulnerability to compensation claims and the ensuing reputational damage is escalating as many supervisors broaden the definition of conduct risk. In the UK, for example, the new Financial Conduct Authority is looking beyond how products are sold to whether they meet customer expectations and deliver value for money over time. At the very least, insurers will need to check through their existing portfolios for potential mis-selling under this new definition and judge how their product design and sales practices may need to be modified. Smart businesses will be looking beyond conduct risk as simply a compliance exercise by using it as a catalyst for sharpening customer understanding and rebuilding public trust. The fragile economic environment and subdued investment performance also remain high on the list of concerns. Managing these challenges is clearly a critical boardroom priority. But there s a risk that by solely focusing on these short-term issues insurers could miss the even more far-reaching threats and opportunities coming up over the horizon. The industry faces transformational shifts in technology and customer expectations, which are reshaping how insurance is sold, how risk is priced and even what we mean by insurance. These developments could open the way for nimble new entrants or other financial services players to move in and pick off the most profitable business. Experience in travel, music and retail shows how quickly existing players can be marginalised if they fail to respond to new ways of doing business. It s certainly notable that innovation has come in at number 13 on the list of risks and the focus is likely to increase as the pace of change continues to accelerate. I would like to thank the CFSI for the richness of insight and perceptive comment in this report. With people around the world living longer and with more wealth to protect, the prospects for insurers are very positive. But their ability to identify and manage emerging as well as familiar risks will be one of the key differentiators for success. I hope you find Insurance Banana Skins 2013 useful and thought-provoking. If you have any feedback or would like to discuss any of the issues raised in more detail, please do not hesitate to contact me. David Law Global Insurance Leader PwC 2 CSFI / New York CSFI Web:

5 About this survey Insurance Banana Skins 2013 surveys the risks facing the insurance industry at a time of considerable market uncertainty, and identifies those that appear most urgent to insurance practitioners and close observers of the insurance scene around the world. The report, which updates previous surveys in 2008, 2009 and 2011, was conducted in March and April 2013, and is based on 662 responses from 54 countries. The questionnaire (reproduced in the Appendix) was in three parts. In the first, respondents were asked to describe, in their own words, their main concerns about the insurance sector over the next 2-3 years. In the second, they were asked to rate a list of potential Banana Skins. In the third, they were asked to rate the preparedness of insurance institutions to handle the risks they saw. This report ranks and analyses each Banana Skin individually. Replies were confidential, but respondents could choose to be identified. The breakdown of responses by type of respondent was Other 26% Broking/ Intermediary 6% Life 26% Reinsurance 7% P&C/Non-life 35% Nearly two thirds of the respondents were from the primary insurance industry. The remainder were from the reinsurance and broking sectors, and non-practitioners such as regulators, consultants, analysts and professional services. CSFI / New York CSFI Web: 3

6 Insurance Banana Skins Draft for PwC June C S F I / New York CSFI The breakdown of responses by region was N. America Bermuda 14% Africa 3% Middle East Asia 11% Latin America 4% Europe 46% Far East Pacific 22% The geographic spread overweighs Europe and underweighs other regions. This reflects the fact that much of the international insurance business is concentrated in London. The breakdown of responses by country was Argentina 2 Hungary 4 Poland 4 Australia 28 Iceland 1 Portugal 17 Bangladesh 1 India 39 Romania 5 Belgium 20 Indonesia 1 Russia 1 Bermuda 17 Ireland 13 Serbia 1 Brazil 19 Isle of Man 4 Singapore 31 Canada 47 Italy 3 Slovakia 10 China 13 Jamaica 1 South Africa 12 Cyprus 7 Latvia 4 South Korea 2 Czech Rep. 14 Lebanon 3 Spain 11 Denmark 13 Luxembourg 2 Switzerland 20 Egypt 1 Malaysia 14 Tanzania 1 Finland 5 Malta 3 Taiwan 3 France 2 Mexico 1 Thailand 1 Germany 4 Netherlands 28 Turkey 21 Ghana 5 New Zealand 43 UAE 5 Greece 7 Oman 1 UK 105 Hong Kong 8 Pakistan 1 USA 29 Note: in addition to the above, four respondents said they covered multiple countries. 6 4 CSFI / New York CSFI Web:

7 Insurance Insurance Banana Banana Skins Skins Draft Draft for PwC for PwC June 9 June Regulation is is the top the risk top risk for the for the second second year year running running Summary This survey This survey identifies identifies the risks the facing risks facing the global the global insurance insurance industry industry early in early 2013, 2013, as seen as by seen a sample by a sample of 662 of 662 Insurance Insurance Banana Banana Skins Skins practitioners practitioners and close and observers close observers of the of the scene from scene 54 from countries. 54 countries. It comes It comes at a at a (2011 ranking (2011 ranking brackets) in brackets) time when time the when industry the industry is still is suffering still suffering from the from effects the effects of the of global the global financial financial 1 Regulation 1 Regulation (1) (1) crisis crisis and and uncertain an uncertain economic economic 2 Investment 2 Investment performance performance (4) (4) outlook, outlook, as well as as well a persistent as a persistent excess excess of capacity of capacity in the non-life in the non-life sector which sector which 3 Macro-economic 3 Macro-economic environment environment (3) (3) is hurting is hurting profitability. profitability. However, However, there there 4 Business 4 Business practices practices (18) (18) are signs are of signs improvement of improvement in what in we what we 5 Natural 5 Natural catastrophes catastrophes (5) (5) call the call industry s the industry s anxiety anxiety level. level. 6 7 Guaranteed 6 Guaranteed products products (-) (-) Quality 7 Quality of risk management of risk management (15) (15) The top The risk top identified risk identified by the by survey the survey is is 8 Quality 8 Quality of management of management (14) (14) the burden the burden of regulation of regulation that is that being is being 9 Long 9 tail Long liabilities tail liabilities (7) (7) placed placed on the on industry the industry by a wave by a of wave of 10 Political 10 Political interference interference (11) (11) regulatory regulatory reform reform at international international and and 11 Distribution 11 Distribution channels channels (9) (9) local levels, local levels, in particular in particular the EU s the EU s 12 Actuarial 12 Actuarial assumptions assumptions (12) (12) Solvency Solvency 2 Directive. 2 Directive. The fear The is fear that is that these initiatives these initiatives will load will the load industry the industry 13 Innovation 13 Innovation (-) (-) with with heavy heavy costs, costs, and and distract distract 14 Reputation 14 Reputation (16) (16) management management from the from task the of task running of running 15 profitable profitable businesses. businesses. This is This the third is the third 16 time in time four in surveys four surveys that regulatory that regulatory 17 Change 15 Change management management (31) (31) Capital 16 Capital availability availability (2) (2) Corporate 17 Corporate governance governance (8) (8) risk has risk topped has topped the Banana the Banana Skins Skins 18 Climate 18 Climate change change (20) (20) survey, survey, identifying identifying this as this a major as a major 19 Human 19 Human resources resources (6) (6) force force shaping shaping (many (many of our of our 20 Product 20 Product development development (24) (24) respondents respondents would would say damaging) say damaging) the the 21 Social 21 media Social (-) media (-) economics economics and structure and structure of the of the industry. industry. Concern Concern about regulatory about regulatory risk risk 22 Crime 22 (22) Crime (22) was global. was global Complex 23 Complex instruments instruments (19) (19) Reinsurance 24 Reinsurance (21) (21) Sharpening Sharpening these concerns these concerns is the is fact the fact 25 that these that reforms these reforms are being are introduced being introduced 26 at a time at a when time industry when industry profitability profitability is 27 is Back 25 office Back (17) office (17) Pollution 26 Pollution (25) (25) Terrorism 27 Terrorism (23) (23) being being hurt hurt by poor by poor investment investment performance performance (No. 2), (No. particularly 2), particularly low low interest interest rates, and rates, by and a highly by a highly uncertain uncertain macro-economic environment environment (No. 3), (No. 3), particularly particularly in the in eurozone. the eurozone. Low yields Low yields have raised have raised particular particular concerns concerns about the about the management management of guaranteed of guaranteed products products (No. 6) (No. which 6) which cannot cannot be profitably be profitably funded funded in in current current market market conditions. conditions. Excess Excess capacity capacity is another is another problem problem in some in sectors, some sectors, notably notably reinsurance. reinsurance. A very A striking very striking riser this riser year this year concern is concern about the about industry s the industry s business business practices practices (up (up from No. from 18 No. to No. 18 to 4). No. Part 4). of Part this of rise this is rise accounted is accounted for by for our by broadening our broadening the the definition definition of this of risk this to risk fit more to fit closely more closely with the with regulators the regulators approach, approach, and also and by also by the inclusion the inclusion this in year s this year s survey survey of a larger of a larger sample sample of emerging of emerging markets markets where where business business practice practice awareness awareness is still is growing. still growing. Nonetheless, Nonetheless, responses the responses revealed revealed concern concern that there that had there been had slippage been slippage in business business standards standards despite despite stronger stronger regulatory regulatory scrutiny scrutiny - under - pressure under pressure to achieve to achieve sales in sales sluggish in sluggish market market conditions. conditions. Striking, Striking, however, however, was the was absence the absence of any of similar any similar rise in rise concern in concern about reputation about reputation CSFI / New York CSFI Web: 5

8 Insurance Insurance Banana Skins Banana Draft Skins for Draft PwC for June PwC June Rising Rising concern concern about the about the industry s industry s ability ability to adapt to adapt risk (No. 14) risk where (No. 14) there where was, there if anything, was, if a anything, tone of complacency a tone of complacency in some of in the some of the responses. responses. Against this Against difficult this background, difficult background, concern about concern the quality about the of quality management of management (No. (No. 8) and particularly 8) and particularly of risk management of risk management (No. 7) in (No. insurance 7) companies insurance companies has risen, has risen, with long with tail long liabilities tail liabilities (No. 9) still (No. attracting 9) still attracting attention. attention. Other high Other level high level operational operational risks included risks the included management the management of distribution of distribution channels in channels a market in a market where choices where are choices proliferating, are proliferating, the quality the of quality actuarial of assumptions, actuarial assumptions, and the and the industry s mixed industry s record mixed in the record area in of the innovation area of innovation (No. 13). However (No. 13). concern However about concern about back office back risk was office low risk (No. was 25). low (No. 25). A number A of number risks have of risks undergone have undergone big changes big in changes ranking in this ranking year, an this indication, year, an indication, we think, we of the think, uncertain of the state uncertain of the state industry. of the Change industry. management Change management (i.e. the (i.e. the industry s ability industry s to restructure ability to restructure itself successfully) itself successfully) has come up has dramatically come up dramatically from from No. 31 to No. 315, to reflecting No. 15, the reflecting expectation the expectation that there that will there have will to be have marked to be marked structural changes structural in changes the industry the in industry response in to response powerful to market powerful and market regulatory and regulatory pressures. On pressures. the other On hand, the other there hand, has been there a has sharp been fall a in sharp concern fall in about concern capital about capital availability availability (down from (down No. 2 from to No. No. 16) 2 because to No. 16) of because the excess of capital the excess now capital washing now washing about the about system the and system creating and strong creating downward strong downward pressure on pressure rates and on margins. rates and margins. Similarly, changed Similarly, market changed conditions market conditions have relaxed have concerns relaxed about concerns the availability about the availability of of human resources human resources (down from (down No. 6 from to No. 19) 6 to because No. 19) of because the large of number the large of number of people seeking people work seeking the work financial the services financial market. services market. Big movers Big movers This year s survey This year s has produced survey has dramatic produced changes dramatic in the changes ranking the of some ranking Banana of some Banana Skins, reflecting Skins, shifting reflecting perceptions shifting perceptions of risk in a volatile of risk in market. a volatile Here market. are some Here of are some of the big movers. the big movers. UP UP Investment Investment performance: performance: very difficult very to achieve difficult necessary to achieve returns necessary after returns five years after five years of low yields. of low yields. Quality of management Quality of management and of risk and management: of risk management: doubts about doubts the ability about of the ability of management management teams to handle teams exceptionally to handle exceptionally difficult trading difficult conditions. trading conditions. Business practices: Business concern practices: that concern standards that may standards be slipping may under be slipping pressure under to pressure reach to reach sales targets sales in difficult targets market in difficult conditions market conditions DOWN DOWN Capital availability: Capital availability: industry now industry has too now much has capital too much rather capital than too rather little. than too little. Human resources: Human soft resources: financial soft services financial labour services market labour favours market employers. favours employers. Corporate governance: Corporate governance: greatly improved greatly after improved recent after drive recent to raise drive board to quality. raise board quality. We introduced We introduced a new Banana a new Skin Banana this year, Skin social this year, media, social to measure media, to the measure level of the level of concern about concern the about influence the of influence Facebook of Facebook and the like and on the customers like on customers and their and their choices. The choices. fact that The it fact came that it No. came 21 suggests at No. 21 that suggests it is still that low it is on still the low horizon, on the horizon, though some though respondents some respondents felt the industry felt the should industry take should greater take notice greater because notice of because its of its fast-growing fast-growing potential to potential affect markets. to affect markets. Among the Among major the underwriting major underwriting risks we asked risks about, we asked only about, natural only catastrophes natural catastrophes achieved a achieved high ranking a high (No. ranking 5), unchanged (No. 5), unchanged from last time, from last mainly time, because mainly of because of concern about concern the rise about in incidents the rise in and incidents overdue and disasters. overdue disasters. Other underwriting Other underwriting risks risks CSFI / New York CSFI Web:

9 Insurance Insurance Banana Skins Banana Draft Skins for PwC Draft June for PwC June Regulation Regulation is is a global a global concern concern we follow were follow low order, were mainly low order, because mainly insurers because felt insurers they were felt in they business were in to business to assess these assess risks and these should risks be and able should to handle be able them, to handle i.e. climate them, i.e. change climate (No. change 18), (No. 18), pollution (No. pollution 26) and (No. terrorism 26) and (No. terrorism 27). (No. 27). Type of respondent Type of respondent The survey shows The survey some shows divergence some between divergence the between concerns the of concerns different of sectors different of the sectors of the insurance industry. insurance The industry. concern The with concern regulation, with regulation, for example, for was example, No. 1 for was the No. life 1 for the life side, but No. side, 2 and but No. 32 for and non-life No. 3 for and non-life reinsurance and reinsurance respectively respectively who gave a who gave a higher ranking higher to ranking natural catastrophe to natural catastrophe risk. Otherwise, risk. Otherwise, there were there strong were shared strong shared concerns about concerns investment about investment performance, performance, the macro-economic the macro-economic outlook, and outlook, with and with various aspects various of management aspects of management quality in insurance quality in companies. insurance companies. The retailing The sectors retailing sectors (life and non-life) (life and saw non-life) business saw practices business posing practices potential posing difficulties, potential difficulties, while the while the main concern main on concern the reinsurance on the reinsurance side was with side excess was with capacity excess and capacity soft market and soft market conditions. conditions. Geography Geography A breakdown A of breakdown responses of by responses region also by shows region a also strong shows consensus a strong about consensus the size about of the size of the regulatory the threat, regulatory with threat, only one with region only (Middle one region East/Asia) (Middle not East/Asia) placing it not as placing their it as their No 1 concern. No 1 Otherwise concern. Otherwise main differences the main differences surrounded surrounded the economic the outlook economic outlook where Europe where showed Europe much showed the strongest much the concerns, strongest followed concerns, by followed North America by North America and, distantly, and, by distantly, other parts by other of the parts world. of However, the world. outside However, Europe outside and Europe North and North America there America was there rising was concern rising with concern management with management issues such issues as business such as business practices, and practices, the quality and of the management quality of management and corporate and governance. corporate governance. Preparedness Preparedness Respondents Respondents were asked how were well asked prepared how well they prepared thought they thought insurance the industry insurance was industry was to handle the to risks handle they the had risks identified. they had On identified. a scale of On 1 a (poorly) scale of to 15 (poorly) (well) they to 5 gave (well) they gave an average response an average of response 2.95 which of 2.95 is middling. which is We middling. have changed We have the changed methodology the methodology this year so this no year direct so comparison no direct comparison can be made can with be made last time. with Strong last time. risk Strong risk management management was a key determinant was a key determinant of good preparedness. of good preparedness. The Insurance The Banana Insurance Skins Banana Index Skins Index 5 4 Regulation 5 Investment Investment Regulation performance performance 4 Regulation Regulation Regulation Regulation Avg score Top score Avg score Top score The Insurance The Insurance Banana Skins Banana Index Skins provides Index a provides picture of a changing picture of anxiety changing anxiety levels in the levels insurance the business. insurance The business. top line The shows top the line average shows the score average given score to the given to the top risk over top the risk last over four the surveys, last four and surveys, the bottom and line the bottom the average line the of all average the risks. of all the risks. For the first For time the this first year, time both this lines year, show both a lines downward show a trend downward suggesting trend that suggesting the that the anxiety level anxiety may finally level may have finally turned. have turned. 9 9 CSFI / New York CSFI Web: 7

10 Insurance Insurance Banana Skins Banana Draft Skins for Draft PwC for June PwC June Different Different sectoral sectoral risk priorities risk priorities Who said Who what said what A breakdown A breakdown of the results of the by respondent results by respondent type and region type and shows region a strong shows common a strong common concern with concern the negative with the impact negative of impact new regulations of new regulations the insurance on the business, insurance business, against a background against a background of difficult of market difficult conditions. market conditions. However there However are also there striking are also striking sectoral and sectoral geographical and geographical differences. differences. Life insurance Life insurance 1 Regulation 1 Regulation The life insurance The life industry insurance faces industry big faces big 2 Macro-economic 2 Macro-economic envt. envt. regulatory changes: regulatory a changes: tougher solvency a tougher solvency regime, and regime, new regulations and new regulations the sale on and the sale and 3 Guaranteed 3 Guaranteed products products distribution distribution of life and savings of life and products. savings There products. There 4 5 Investment 4 Investment performance performance are concerns are about concerns its ability about to its handle ability this to handle this Business 5 practices Business practices huge agenda. huge At agenda. the same At time, the same investment time, investment 6 Distribution 6 Distribution channels channels markets are markets difficult are because difficult of because low interest of low interest rates and economic rates and uncertainty. economic uncertainty. There are also There are also 7 Reputation 7 Reputation longer term longer questions term about questions the viability about the of viability the of the 8 Quality 8 of management Quality of management traditional life traditional insurance life savings insurance model savings and model and 9 Political 9 interference Political interference guaranteed guaranteed products. The products. sector s The reputation sector s reputation 10 Quality 10 of risk Quality mgt. of risk mgt. could do with could a polish. do with a polish. Non-life Non-life 1 Natural 1 catastrophes Natural catastrophes Although the Although incidence the of incidence major catastrophes of major catastrophes 2 Regulation 2 Regulation such as floods such and as floods earthquakes and earthquakes has been less has been less severe in the severe past year, in the these past year, remain these remain nonlife s top concern. life s top The concern. insurance The cycle insurance is also cycle is also the non- 3 Investment 3 Investment performance performance 4 Climate 4 change Climate change at a low point, at a with low point, little sign with of little recovery sign of in recovery a in a 5 Business 5 practices Business practices soft market soft and market in the performance and in the performance of of 6 Macro-economic 6 Macro-economic envt envt investments. investments. These concerns These come concerns top come of on top of 7 Quality 7 of risk Quality mgt. of risk mgt. heavy regulatory heavy demands regulatory as demands well as as well as 8 Actuarial 8 assumptions Actuarial assumptions continuing continuing uncertainty uncertainty about the global about macroeconomic outlook. economic Business outlook. practices, Business practices, the global macro- 9 Innovation 9 Innovation particularly particularly mis-selling, mis-selling, could be slipping could be slipping 10 Long tail 10 liabilities Long tail liabilities under pressure under to pressure achieve sales. to achieve sales. Reinsurance Reinsurance 1 Investment 1 Investment performance performance The reinsurance The reinsurance market has market been bearing has been the bearing the 2 Natural 2 catastrophes Natural catastrophes brunt of the brunt surge of in the catastrophe surge in catastrophe claims a claims at a time when time market when conditions market are conditions difficult are and difficult and 3 Regulation 3 Regulation investment investment returns are returns poor. Regulatory are poor. Regulatory 4 Macro-economic 4 Macro-economic envt. envt. pressures are pressures growing. are Conditions growing. Conditions are are 5 Long tail 5 liabilities Long tail liabilities intensely competitive: intensely competitive: capacity is capacity ample and is ample and 6 Quality 6 of management Quality of management pricing is soft. pricing Management is soft. Management is under pressure is under pressure 7 Change 7 management Change management to show that to it show can steer that it firms can steer through firms these through these 8 Actuarial 8 assumptions Actuarial assumptions challenging challenging times. It is times. hoping It for is hoping a capacity for a capacity shake-out to shake-out bring about to bring firmer about market firmer market 9 Quality 9 of risk Quality mgt. of risk mgt. conditions. conditions. 10 Climate 10 change Climate change 8 CSFI / New York CSFI Web:

11 Insurance Banana Insurance Skins Banana Draft for Skins PwC Draft June for 9 PwC 2013 June Observers Observers 1 Regulation 1 Regulation Observers (respondents Observers to (respondents the survey who to the are survey who are 2 Investment 2 performance Investment performance not insurance practitioners not insurance but practitioners close to the but close to the industry) also have industry) regulatory also have risk regulatory as their top risk as their top 3 Macro-economic 3 Macro-economic envt. envt. concern. This is concern. an important This is finding an important since it finding since it 4 Business practices 4 Business practices says that this risk says is that not just this an risk industry is not just an industry Guaranteed 5 products Guaranteed products obsession. Observers obsession. also Observers share the industry s also share the industry s Political interference 6 Political interference concerns with difficulties concerns with thrown difficulties up by tough thrown up by tough Long tail liabilities 7 Long tail liabilities trading conditions: trading poor conditions: investment poor investment 8 Natural catastrophes 8 Natural catastrophes performance and performance the risks posed and the by guaranteed risks posed by guaranteed products. The quality products. of insurance The quality industry of insurance industry 9 Quality of management. 9 Quality of management. management is management always a concern is always among a concern nonpractitioners. among nonpractitioners. 10 mgt. Quality of 10 risk mgt. Quality of risk Macro-economic Macro-economic worries focus worries on focus on Europe Europe North America North and America Bermuda and Bermuda 1 Regulation 1 Regulation Regulation topped Regulation the list of topped risks the for list almost of risks for almost 2 Natural catastrophes 2 Natural catastrophes all geographic areas all geographic covered by areas the covered survey, by the survey, making this a truly making global this issue. a truly In global the US issue. and In the US and 3 Investment 3 performance Investment performance Canada, concern Canada, about the concern cost and about distraction the cost and distraction 4 Long tail liabilities 4 Long tail liabilities of regulation coloured of regulation the majority coloured of the majority of Macro-economic 5 Macro-economic envt responses; envt in Bermuda responses; the in top Bermuda concern the was top concern was Guaranteed 6 products Guaranteed products with natural catastrophes, with natural the catastrophes, cost of which the cost of which Climate change 7 Climate change eventually ends eventually up in the reinsurance ends up the sector. reinsurance sector. 8 Actuarial assumptions 8 Actuarial assumptions Although this region Although shared this the region general shared the general concern about the concern investment about the outlook, investment it was outlook, it was 9 Quality of management 9 Quality of management less worried about less macro-economic worried about macro-economic risk than risk than 10 Political interference 10 Political interference Europe because Europe of its more because buoyant of its more buoyant economies. economies. Europe Europe 1 Regulation 1 Regulation The European response The European is more response global than is more it global than it 2 Macro-economic 2 Macro-economic envt looks envt because many looks of because the respondents, many of the respondents, particularly from particularly London, were from from London, different were from different 3 Investment 3 performance Investment performance parts of the world. parts This of the ranking, world. therefore, This ranking, therefore, 4 Guaranteed 4 products Guaranteed products reflects the broadest reflects consensus the broadest about consensus the risks about the risks Business practices 5 Business practices facing the global facing insurance the global industry: insurance industry: Political interference 6 Political interference burgeoning regulation, burgeoning uncertainty regulation, about uncertainty the about the Long tail liabilities 7 Long tail liabilities economic and investment economic and environments, investment and environments, and 8 Quality of risk 8 mgt Quality of risk underwriting mgt uncertainties. underwriting At uncertainties. the operating At the operating level, there was level, still concern there was about still mis-selling, concern about mis-selling, 9 Natural catastrophes 9 Natural catastrophes and about the new and challenges about the new presented challenges by the presented by the 10 Distribution 10 channels Distribution channels burgeoning choice burgeoning of distribution choice channels. of distribution channels CSFI / New York CSFI Web: 9

12 Insurance Banana Skins Draft for PwC June Middle East/Asia* 1 Business practices This was the only region which did not have 2 Natural catastrophes regulation at the top of its list. Instead there was strong concern with institutional issues, 3 Quality of risk mgt particularly business practices such as misselling and the quality of risk management. 4 Investment performance 5 Quality of management There was a low level of concern with macroeconomic 6 Regulation issues, reflecting the more dynamic 7 Reputation position of countries like India. On the other 8 Corporate governance hand, management and corporate governance issues ranked high in a region where these 9 Innovation have not traditionally been a priority. 10 Actuarial assumptions *Bangladesh, Egypt, India, Lebanon, Oman, Pakistan, Turkey, UAE Far East/Pacific* 1 Regulation Although this region contains a mix of 2 Investment performance developing and developed countries, it shares the global concern with excessive regulation: 3 Distribution channels this applies as much to South Korea as it does 4 Reputation to Australia. This was also the region which 5 Quality of management gave the highest ranking to reputation risk, 6 Natural catastrophes reflecting the controversial response of 7 Business practices insurance companies to the string of natural 8 Macro-economic envt disasters which hit it two years ago. Human resource risks have always featured in this 9 Actuarial assumptions region, reflecting a shortage of talent. But 10 Human resources macro-economic concerns are relatively low. *Australia, China, Hong Kong, Indonesia, Malaysia, New Zealand, Singapore, South Korea, Taiwan, Thailand 10 CSFI / New York CSFI Web: 12

13 Insurance Banana Skins Draft for PwC June Preparedness We asked respondents how well prepared they thought the insurance industry was to handle the risks they had identified. 60% 50% 40% 30% 20% 10% 0% On a scale of 1 (poorly) to 5 (well) they gave an average response of 2.95, suggesting positivity and negativity in almost equal measure. More than half of respondents answered 3, with most of the rest split evenly between 2 and 4. Very few ranked preparedness at either extreme end of the scale, though of those that did, four times as many answered 1 as 5. Although we have changed the methodology this year so no direct comparison can be made, the results seem to echo what we found in 2011, when on a scale of poorly, mixed and well, 87 per cent of respondents chose mixed. The primary reason for good preparedness was the perception that the industry had prioritised risk management and has become increasingly conscious of the major threats it faces. Large, multinational insurers in particular were seen by many respondents as having adequate controls in place. The reasons for poor preparedness included a shortage of innovation and cumbersomeness in adapting to changing environments, the strength of regulatory interference, a lack of quality at board and management level, and an increase in black swan type risks which are very difficult to prepare for. Geographically, preparedness was ranked highest in the Far East Pacific region and lowest in Middle East Asia. Broking/Intermediary respondents ranked it lower than those from the life, non-life and reinsurance sectors. CSFI / New York CSFI Web:

14 Insurance Insurance Banana Banana Skins Draft Skins for Draft PwC for June PwC June Solvency Solvency 2 tops 2 tops the regulatory the regulatory risk agenda risk agenda 1. Regulation 1. Regulation (1) (1) The fast-rising The fast-rising tide of financial tide of financial regulation regulation emerges as emerges the greatest as the risk greatest facing risk the facing the global insurance global insurance industry for industry the second for the year second running, year as running, seen by as respondents seen by respondents to the to the latest Banana latest Skins Banana survey. Skins And survey. global And is the global word is the since word this since risk occupied this risk occupied first or first or second place second in five place out in of five the out six of regions the six we regions surveyed. we surveyed. (The exception (The exception was Middle was Middle East/Asia). East/Asia). Among the Among insurance the insurance sectors, it sectors, came No. it came 1 for No. life 1 and for No. life 2 and for No. non-life. Lest life. it be Lest thought it be that thought this was that just this an was industry just an complaining industry complaining about unpopular about unpopular for non- controls, controls, non-practitioners non-practitioners (i.e. consultants, (i.e. consultants, analysts, analysts, academics academics and other and close other close observers) observers) voted it No. voted 1 as it well. No. 1 It as was well. impossible It was impossible to miss the to sense miss the of frustration, sense of frustration, fury even, fury that even, coloured that coloured many of many the of the responses. responses. It is ironic It that is ironic regulatory that regulatory change is change in is in The reason The was reason clear: was the clear: sheer the volume sheer of volume itself of a driver itself of a risk driver in of the risk industry. the industry. new regulation new regulation that is seen that to is be seen swamping to be swamping Although Although the majority the of majority regulatory of regulatory the industry the with industry costs with and costs distractions, and distractions, and initiatives and initiatives are sound are in principle sound they principle they creating creating a whole a new whole class new of class risk: of may risk: in fact may increase fact the increase risk of the noncompliancecompliance, increase operational increase operational costs costs risk of non- regulatory regulatory compliance. compliance. Many respondents Many respondents expected expected these trends these to trends produce to a produce shakeout in out the in industry the industry between between those those a shake- and reduce and competition reduce competition in the form in of the form of innovation. innovation. Chief risk officer Chief risk officer companies companies which have which the have resources the resources to to South Africa South Africa deal with deal them, with and them, those and that those do not. that do not. Regulatory Regulatory risk was seen risk to was take seen many to take forms. many forms. Uncertainty. Uncertainty. Many major Many regulatory major regulatory initiatives initiatives such as the such EU s as Solvency the EU s Solvency 2 regime 2 regime (see box) (see and box) healthcare and healthcare reform in reform the US in are the still US at are the still planning at the planning stage so the stage so the precise impact, precise particularly impact, particularly on expensive on expensive items like items capital, like is capital, still unknown. is still unknown. Yet Yet insurance insurance companies companies are already are having already to having invest to in invest order in to order be ready to be for ready for implementation. implementation. Countries Countries as far apart as far as Canada, apart as Ghana, Canada, Malaysia Ghana, Malaysia and China and all China all said that said new that capital new regulations capital regulations were in were the works, in the some works, of some them of awaiting them awaiting developments developments in Solvency in Solvency Quality of Quality regulation. of regulation. The quality The of quality insurance of insurance regulation regulation varies widely, varies obviously. widely, obviously. But a number But a of number themes of recurred, themes many recurred, linked many to unwarranted linked to unwarranted intervention intervention and lack and lack of finesse of on finesse the part on of the the part regulator. of the regulator. One was One the failure was the of failure regulators, of regulators, as one as one respondent respondent said, to said, understand to understand the economics the economics and business and model business of model insurance of insurance and to apply and to measures apply measures that were that appropriate. were appropriate. A second A was second that, was regulation that, as regulation becomes becomes more complex, more complex, regulators regulators inevitably inevitably resort more resort to more box ticking to box than ticking than judgment. judgment. An actuary An at actuary one of at the one UK s of the large UK s life large companies life companies said that judgement said that judgement based supervision based supervision seems lacking, seems with lacking, very with considerable very considerable detailed (and detailed relatively (and relatively immaterial) immaterial) questioning questioning and issues and raised issues by raised regulatory by regulatory teams who teams seem who disjointed seem disjointed between lower between and lower upper and level upper of supervisors. level of supervisors. A third was A third the failure was the of failure regulators of regulators to carry to out carry sufficient out sufficient cost/benefit cost/benefit analysis analysis before introducing before introducing potentially potentially burdensome burdensome new regulations. new regulations. A fourth was A fourth the growing was the inconsistency growing inconsistency between jurisdictions between jurisdictions as rules proliferated. as rules proliferated. Dan Brown, Dan partner Brown, at partner SNR Denton at SNR US, Denton said that US, regulatory said that regulatory uncertainty uncertainty at multiple at multiple levels will levels continue will to continue be a drag to be on a the drag industry. on the Regardless industry. Regardless of the ultimate of the outcome, ultimate outcome, the current the disagreements current disagreements and infighting and infighting between (a) between states, (a) (b) states, (b) and states the federal and the federal government, government, (c) the US (c) and the the US EU, and and the (d) EU, within and (d) the within EU hamper the EU growth, hamper place growth, a place a drag on capital, drag on and capital, force and the force industry the to industry stagnate to until stagnate a system until a (any system system) (any is system) is firmly put firmly in place. put in Several place. respondents Several respondents felt that their felt that own their countries own countries would be would be placed at placed a competitive at a competitive disadvantage disadvantage if they became if they compliant became compliant when others when did others not. did not CSFI / New York CSFI Web:

15 Insurance Banana Skins Draft for PwC June A respondent from a Spanish insurer said that unless there is consistency, the need to adopt several new regulations could significantly damage the insurance business, and consume a significant amount of resources. Cost. The high cost of regulation, both as to capital requirements and compliance, was a major concern. The CFO of a large Canadian insurer said: Continual regulatory burdens [are] being pushed onto the industry without appropriate consideration of cost and business impacts. Several respondents said that the added costs would have to be absorbed in ways that would affect the quality of the service. The CEO of an insurer in The world of insurance regulation is rich in acronyms. Here is a selection from our responses. S2, RDR, IFRS, FAIR, RBC2, FOFA, LAGIC, IRAG, ORSA, IPSA, ERM, IBNR, MGA, FSCO, GFC, PRA, FCA, APRA, AUM, OSFI, GASB, ABI, IoA, MGA, TCF, KYC, PPI, IMD2, EIOPA, UL, TIV, FPD, IAIS, CBI, NIC, TVOG, IBNR, D&O, IRDA, PS09/13, GSII, IAIG, COMFRAME, IOIS, NAIC, FSB, SAM. Singapore said: The best intentions to protect our customers will inevitably increase cost to insurers, reduce value to customers, and stifle innovation. A related issue was management distraction. The CFO of a large international company in Singapore said that the high level of regulatory change is resulting in a management team focused on the outside not on the business at hand. Some also felt that regulation was putting good managers and directors off joining the industry. A Canadian risk officer said that given the specialized knowledge of the industry and various industry segments, it is a concern to keep pace with the number of changes within the regulatory environment, and ensure management and the board are aware of the increasing amount of knowledge required for appropriate governance and control. Solvency 2 If concern about regulation has a single focus, it is the Solvency 2 Directive, the EU s ambitious and much-delayed attempt to set capital rules for the insurance industry. Now in its seventh year and counting, Solvency 2 still has no firm timetable which means that the industry has to plan in an environment of great unknowns. The chief risk officer of a large Belgian insurer said that the uncertainty concerning the implementation date of the Solvency 2 directive is a risk that has to be followed up on a regular basis, as this has both strategic and operational implications. Although Solvency 2 only affects the EU market directly, other jurisdictions are modelling their own solvency regimes on it, meaning that uncertainty is much more widespread. Respondents from China, Bermuda, South Africa and Singapore were among those for whom uncertainty about solvency rules was a concern. Quality of the service. The consequences for the client were frequently mentioned. A respondent from South Africa warned that resources would have to be deployed to develop systems and processes to comply with new regulations, rather than focusing on the development of innovative solutions for clients. Although insurers might be expected to say that the regulatory bill would end up with the customer, one respondent (from Australia) identified a potential perverse outcome: even more regulation, driven by popular demand, to keep prices down and force insurers to make particular products available (e.g. car and homeowners insurance). A related issue was competition. Many made the point that rising costs favoured large CSFI / New York CSFI Web:

16 Insurance Banana Skins Draft for PwC June companies and could lead to a shake-out of smaller companies. The financial controller of a large company in London said: Excessive and burdensome regulatory changes will negatively impact the industry due to the cost of implementation by insurance companies. Many small to mid-size companies will not be able to handle additional regulatory filings and disclosures with current staffing levels. Nonetheless, a small number (about 15 per cent) of our respondents felt that regulation was a good thing. Daniel Vanderkemp, regional CFO of ACE Asia Pacific in Singapore, said that this is part and parcel of being in the financial services industry so it should not be considered a risk. Several also said that improvements to regulation were necessary and well intentioned, particularly insofar as capital requirements were concerned. An Indian respondent observed that in an emerging insurance sector, a good regulator would be a boon and a respondent from Greece added that regulation was only a risk to the extent that insurers pursue strategies that depend on lax supervision. A global concern What is striking about concern over regulatory excess is how global it is. selection of responses to illustrate this. Here is a Denmark. [The concern is] the aggregate of many regulatory initiatives which, seen in isolation are sensible and reasonable, but where the consequences of the sum of them is unknown and potentially of a very large size. Ghana. The regulatory framework continues to be sub-divided instead of consolidated to bring efficiency and completeness. An example is the set-up of a separate regulatory entity for health insurance and pensions, outside the purview of the National Insurance Commission. Hong Kong. [Our concern is] regulatory risk, in particular changing regulations, and inconsistencies across jurisdictions for multi-national players such as ourselves. [But there is] an expectation that all should apply (e.g. both local and international) which is complex to manage, and there can be contradictions. India. Regulatory oversight is fine, but regulatory over-indulgence may spell doom for the industry. Latvia. The regulatory burden is increasing The [low] profitability of the Latvian insurance market may reduce the cover and consequently the trust of customers. Malta. Regulatory issues continue to take up a lot of resources and represent an unknown area as to when they will be implemented and to what extent. New Zealand. Regulation is overwhelming the industry, and impacting heavily on productivity and resources to such an extent that niche insurers like us may struggle to continue. South Korea. Government regulation [is having] an adverse effect on insurance companies. US. This is the biggest problem in the business and more damage is coming. 14 CSFI / New York CSFI Web: 16

17 Insurance Insurance Banana Skins Banana Draft Skins for PwC Draft for June PwC June Five years Five of years of record record low yields low yields are taking are taking their toll their toll 2. Investment 2. Investment performance performance (4) (4) Five years Five of low years interest of low rates interest are putting rates are pressure putting on pressure an industry on an which industry has which has become increasingly become increasingly dependent dependent on investment on investment earnings to earnings make up to for make declining up for declining insurance business insurance returns. business The returns. concern The is concern not just is about not low just about yields low in the yields bond in the bond markets but markets the pressure but the that pressure insurance that companies insurance companies face to compensate face to compensate by taking on by taking on more risk in more new risk markets. in new This markets. Banana This Skin Banana was ranked Skin was No. ranked 1 by reinsurance, No. 1 by reinsurance, no. 3 no. 3 by non-life by and non-life no. 4 by and life. no. 4 by life. As with many As with of the many top of risks the in top this risks survey, in this this survey, is not this a localised not a concern, localised but concern, but global because global of because the linkage of the between linkage markets. between A markets. reinsurance A reinsurance risk officer risk in officer in Switzerland Switzerland said that the said main that the risk for main life risk insurance for life is insurance continuing is continuing low interest low interest rates. Similarly, rates. the Similarly, very weak the investment very weak investment returns for P&C returns insurance for P&C will insurance jeopardize will jeopardize its profitability. its profitability. I see the main I see risk the for main the risk insurance for the industry insurance coming industry from coming the weak from the weak economy and economy the low and return the low achievable return achievable on the financial on the markets. financial In markets. India, a In India, a respondent respondent said that as said barely that as any barely insurer any is making insurer is a substantial making a substantial underwriting underwriting profit, the poor profit, investment the poor investment climate is bound climate to is harm, bound and to harm, in Australia, and in a Australia, respondent a respondent said: Like said: most Like insurers, most we insurers, rely on we investment rely on investment income to maintain income to a maintain prudential a prudential level of capital. level Poor of capital. investment Poor investment returns will returns translate will to translate higher premiums. to higher premiums. Furthermore, Furthermore, respondents respondents expect sluggish expect economic sluggish conditions, economic conditions, and therefore and low therefore low interest rates, interest to continue rates, to for continue a while. for In a Canada, while. In an Canada, insurance regulator insurance said regulator that said that persistent persistent low-long term low-long interest term rates interest are forcing rates are Canadian forcing companies Canadian companies to increase to increase reserves on reserves long-tail on business, long-tail thus business, straining thus earnings straining and earnings capital and capital reducing and their reducing their return on equity. return on This equity. situation This could situation continue could for continue some time for some due to time eurozone due to eurozone uncertainty uncertainty and high US and debt. high In US response, debt. In companies response, companies may look may for higher look for higher risk/return risk/return investments investments to increase to long-term increase yields long-term or improve yields or RoE. improve However RoE. a However a chief risk officer chief risk at a officer Canadian at a life Canadian company life had company a further had concern: a further We concern: just We just experienced experienced largest deliberate largest action deliberate to manage action rates to manage down rates that we down have that seen we in have our seen in our lifetime, so lifetime, we may so naturally we may expect naturally this expect to be followed this to be by followed the largest by the up spike largest in up spike in rates we ve rates ever we ve experienced. ever experienced. The last point The about last point companies about companies chasing higher chasing returns higher was returns picked was up by picked many up other by many other respondents. respondents. In the Lloyd s In the market, Lloyd s Sir market, Adam Ridley, Sir Adam chairman Ridley, of chairman Equitas of Trust, Equitas Trust, said that competitive said that competitive pressures in pressures a low return in a environment low return environment are the ideal are recipe the ideal for recipe for tempting foolish tempting managers foolish into managers taking into excessive taking and excessive unhedged and risks. unhedged One risks. non-life One non-life insurer in insurer the Netherlands in Netherlands was disarmingly was disarmingly candid: We candid: rely We too much rely too on much on investment investment income; this income; could hit this us could in the hit face us easily. in the face easily. Some respondents Some respondents were especially were especially gloomy about gloomy the about outlook the for outlook traditional for traditional life/savings life/savings /pensions because /pensions of because the difficulty of the of difficulty designing of appealing designing products. appealing products. Jozef Koma, Jozef director Koma, of director risk management, of risk management, actuarial analysis actuarial and analysis reinsurance and reinsurance at at Union Insurance Union Company Insurance in Company Slovakia in said: Slovakia It is said: possible It is that possible traditional that saving traditional saving life insurance life will insurance be wiped will out be if wiped reasonable out if reasonable returns to clients returns cannot to clients be achieved. cannot be achieved. Similarly, the Similarly, poor performance the poor performance of investment of investment funds could funds weaken could interest weaken in unitlinked products. linked interest in unit- products. 3. Macro-economic 3. environment environment (3) (3) The uncertain The state uncertain of the state global of economy the global is economy having a is major having impact a major on all impact aspects on of all aspects of the insurance the industry: insurance growth industry: prospects, growth investment prospects, investment returns, balance returns, sheets balance etc. sheets etc. Macro-economic Macro-economic risk was a particularly risk was a particularly strong concern strong in concern Europe (where in Europe it ranked (where it ranked CSFI / New York CSFI Web: 15

18 Insurance Banana Skins Draft for PwC June No. 2), compared to North America (No. 5) and Asia/Far East (No. 8). However, there is some comfort in the fact that the score given to this Banana Skins was the lowest since 2007, suggesting that the absolute level of concern is falling. The survey was conducted in the aftermath of the Cyprus crisis, meaning that euro turbulence was very much on people s minds. The chief actuary at a large UK mutual said: The euro is unsustainable in its current form, and low economic growth is going to make change inevitable. Europe cannot manage change quickly enough which will lead to volatility in financial markets. The CFO of a large Swiss insurer said that the threat is biggest in Europe with both low growth and low interest rates. What it feels like to be selling insurance in Cyprus The general financial distress and the subdued economic activity prevailing in Cyprus during the past three years have taken their toll on the Cyprus insurance industry as well. Extremely limited opportunities for business growth, intense market competition and continued deteriorating results, coupled with a complete asset meltdown, have been the main areas of concern for the industry. The application by the Cyprus Government for financial aid by the Troika and the terms of the Memorandum of Understanding signed on 2nd April 2013 for a 10 billion support programme, as well as the resolution and restructuring plan of the two largest banks in Cyprus, point to a prolonged recession period. It is anticipated that these developments will have a further adverse impact on the activities of insurance companies, in terms of their opportunities for growth and profitability. A sharp rise in relation to fraudulent and/or exaggerated claims, growing receivables as well as lack of liquidity are some of the many challenges that insurance companies will need to address in the next 2-3 years. Managing director General insurance company Responses from other parts of the world give a flavour of wider concerns. India: [The macro-economic environment] is a big risk given the current conditions. Australia: The miracle economy is slowing as the mining investment boom slows. Other sectors struggle. This is a significant threat. Brazil: If the US and the EU fail to recover and start buying again, Brazil could engage on a longer period of low growth with high inflation. South Africa: Continued economic uncertainty, as well as related volatile and potentially under-performing investment markets will impact negatively on the performance of the insurance industry. Although there is a school of thought which says that insurance operates to its own cycle and that people need insurance whatever the weather, most of our respondents believed that an extended period of sluggish growth would hit sales of savings and protection products, while low yields would squeeze financial returns and complicate the guaranteed yield market. A respondent from the US said that the markets are the key to capacity. Insurance is not an isolated market sector. Commenting from Turkey, a market with a different perspective, a composite insurer said: The current economic turmoil seems set to continue for the coming 2-16 CSFI / New York CSFI Web: 18

19 Insurance Insurance Banana Skins Banana Draft Skins for PwC Draft June for PwC June years and 3 years will continue and will to continue affect the to insurance affect the industry, insurance especially industry, in especially the in the economies with economies low insurance with low penetration. insurance penetration. Another concern Another was concern that the was poor that economic the poor environment economic environment would increase would increase competitive competitive pressures among pressures existing among players existing and players from new and from entrants new seeking entrants seeking opportunities opportunities to deploy excess to deploy capital. excess Greg capital. Carter, Greg director Carter, of market director services of market at services at Capita Commercial Capita Commercial Insurance Services Insurance in Services the UK, in said the that UK, low said growth that low rates growth rates globally, together globally, with together an abundance with an of abundance capital, mean of capital, that competitive mean that competitive pressures are pressures are likely to depress likely earnings to depress for earnings the industry, for the leading industry, to losses leading for to some, losses or for potentially some, or potentially many, in the many, sector. in the sector. Many respondents Many respondents also saw tougher also saw conditions tougher bringing conditions bringing higher lapse on higher and claim lapse and claim rates. Cheung rates. Wai Cheung Man Raymond, Wai Man chief Raymond, risk officer chief risk at AIG officer Asia at AIG Pacific Asia in Pacific in Singapore, said Singapore, that the said insurance that the sector insurance is often sector known is often to be known neutral to to be the neutral macroeconomic environment economic environment as, whether as, in whether good or in bad good times, or people bad times, need people insurance. need insurance. to the macro- However, studies However, also studies show that also claims show that tend claims to increase tend to during increase times during of economic times of economic downturn. downturn. Standards Standards may may be slipping be slipping under under pressure pressure to to produce produce sales sales 4. Business 4. Business practices practices (18) (18) The sharp The rise sharp in the rise position in the of position this Banana of this Skin Banana comes Skin partly comes because partly of because of redefinition. redefinition. In previous In surveys, previous we surveys, focused we on focused Retail Sales on Retail Practices, Sales but Practices, we but we decided that decided we should that survey we should Conduct survey of Conduct Business of more Business widely, more not widely, least because not least because that is what that the regulators is what the are regulators watching. are watching. Even so, we Even judged so, that we judged this Banana that this Skin Banana would Skin have would risen anyway. have risen Despite anyway. the Despite the huge amount huge that amount has been that done has by been companies done by and companies regulators and to regulators clean up to business clean up business practices, this practices, is still an this area is still of high an area risk of particularly high risk particularly at a time of at economic a time of stress economic stress when pressure when to generate pressure sales to generate is strong. sales is strong. Regionally, Regionally, this risk was this seen risk to was be highest seen to in be the highest Middle in the East Middle and Asia East (No. and 1) Asia (No. 1) followed by followed Europe (No. by Europe 5) and (No. the Far 5) and East/Pacific the Far East/Pacific (No. 7). It only (No. ranked 7). It only No. ranked 17 No. 17 in North America. in North Among America. the Among types of the respondent, types of respondent, the highest level the highest of concern level was of concern was among brokers among (no. brokers 4) with (no. both 4) life with and both non-life and at no. non-life 5. at no. 5. For many For respondents, many respondents, the difficult the economic difficult environment economic environment made this made risk this risk particularly particularly hard to manage. hard The to manage. CFO of The a non-life CFO of company a non-life in company the Czech in Republic the Czech Republic said that there said was that pressure there was on pressure quantity, on not quantity, on quality not on and quality the head and of the marketing head of marketing at a large Indian at a large insurer Indian observed insurer that observed chasing that only chasing the top only line the without top line any without regard any regard for the quality for of the risks quality may of lead risks the may insurance lead the company insurance into company the red. into The the head red. of The head of R&D and actuarial R&D and services actuarial at a services Belgian at reinsurer a Belgian said reinsurer that the said fact that of the fact market of the market being increasingly being increasingly competitive, competitive, rapid and professional rapid and professional increases the increases risk. the risk. Despite recent Despite improvements, recent improvements, there was still there a was sense still that a sense insurers that lacked insurers full lacked full commitment commitment to eliminating to eliminating this risk, particularly this risk, particularly in emerging in markets emerging where markets where regulation has regulation yet to has catch yet up. to A catch respondent up. A respondent from India from said that India the said current that the current position in position India does in not India bode does well not for bode the well industry, for the while industry, another while from another Brazil from Brazil admitted that admitted this market that this not market the most is not ethical the most or transparent ethical or transparent one in the world. one in It the world. It could face confusion could face as confusion the market as changes. the market changes. A point of A debate point among of debate respondents among respondents was whether was this whether risk was this financial risk was or financial or reputational. reputational. Some argued Some that argued the financial that the penalties financial were penalties still relatively were still small, relatively and small, and offered little offered discouragement little discouragement to the unscrupulous to the unscrupulous salesman compared salesman to compared the to the CSFI / New York CSFI Web: 17

20 Insurance Banana Skins Draft for PwC June reputational damage suffered at the corporate and industry level. For example, an Australian respondent remarked: High risk, but not a high $ impact overall. But a US respondent added: This industry has such a horrible public image that any misstep or perceived shady practice will be dealt with harshly. The aspect of this risk most often identified by respondents was the difficulty of managing distribution, particularly through agents. The country president of a nonlife company in Singapore, said this depends on channels. For agency, the risk is much higher than for sales in a controlled environment e.g. within a call centre, where sales are closely monitored. In India, an insurance industry consultant said that the greatest risk to the industry lay in banks which became agents and dictating their insurance subsidiaries to create policies and thrust them on unwary customers at exorbitant rates. Other aspects of the risk lay in enforcing Know Your Customer rules and controlling questionable practices such as policy churning. The quality of products themselves is a further issue: are they transparent and straightforward (not always easy when regulators demand strings of conditions)? 5. Natural catastrophes (5) In the 2011 Insurance Banana Skins survey this risk jumped 17 places, following a string of major natural catastrophes which included severe earthquakes in New Zealand and Japan. Though the intervening period has not been quite so volatile, the fact that it holds its position this year suggests that it is still at the forefront of the industry s concerns. Sectorally, it was the top risk among non-life insurers and brokers/intermediaries, while geographically, it ranked second in North America and Middle East/Asia. For many, the main concern was that increased frequency of extreme events in recent years will become the new normal, especially in heavily populated and insured areas a fear aggravated by climate change and the anticipation of overdue disasters, such as on the fault lines of New Madrid and San Andreas 18 CSFI / New York CSFI Web: 20 If the big one happens soon, coverage is still far too high and products are still poorly designed. Catastrophe models are simply wrong. We will be in a real mess. Manager New Zealand in the US. At the extreme end of the scale, one risk manager from New Zealand said natural catastrophes could wipe out the industry given a big enough or simultaneous events across different geographies. Others pointed to the underpricing of catastrophe risk partly due to the intensity of competition in the sector and the shortcomings of current models. The chief financial officer at a non-life insurer in Singapore said: As players look to grow by penetrating new markets, products, demographics and exposures there is a risk that historical data and/or models simply are not adequate. Recent catastrophes in both developed and developing markets have shown that not all risks are well understood or modelled. But one respondent from the US disagreed, saying: The sophistication of models seems to be working for insurers; the run of natural catastrophe events over the last five years has barely made a dent in the sector. This is one of the few bright spots in the industry where the traditional approach has worked for the insurers.

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