Needham, Mass. — Shockwaves from the upheaval in the U.S. financial system are spreading across borders and causing tectonic shifts in the global financial services landscape, according to Guillermo Kopp, executive director, global research fellow with Needham, Mass.-based TowerGroup Inc. and author of the report, “The TowerGroup Top 10: A Bumpy Flight, Landing, and Takeoff for the Financial Services Industry.”
“The No. 1 business driver: economic, market and regulatory volatility, also dominates the insurance scene,” Kopp tells INN. “Structural concerns on credit and liquidity affect insurance carriers, given that their financial health is highly dependent on their ability to play profitably in capital markets. For example, shockwaves from the U.S. financial turmoil have hit AIG. Even comparatively healthy companies such as ING are using capital injections as a means to stay competitive as the financial services industry undergoes structural change. In the specific field of life and annuity, the insurance industry is hurting from depressed yields in the short term that undermine customer confidence. Besides caring about the intrinsic threats facing the industry, insurance carriers will need to mind the broader financial picture across all markets globally.”
As has been the case in past economic crises, the financial turmoil of 2008 will bring significant structural changes to the entire financial services industry and regulatory agencies globally. TowerGroup finds that the financial crises of 2008 serve as an ultimatum to both regulators and financial services institutions (FSIs) to swiftly adopt a more integrated risk management framework or face irreparable loss of confidence in the financial industry.
This call to action is a core finding of new research exploring the top 10 fundamental forces driving the financial services industry today and into 2009. In the research, TowerGroup asserts that the industry must undergo core structural shifts to better account for diverse and interdependent risk types. The result will be more transparent and timely gauges of liquidity and credit risk positions, which were lacking in the run-up to the current crisis.
Though they will continue to evolve, the top 10 business drivers TowerGroup lists are:
• Economic, market and regulatory volatility
• Innovation in products and business models
• Demand for performance, liquidity and growth
• Emerging client demands for function and relevance
• Margin compression and operational leverage
• Creative fraud and security threats
• Multigenerational globalization
• Lower barriers to enter and interconnect
• Retired, emerging and ethnic customer segments
• Fresh advances in technologies and capacity
Although local concerns relative to credit, liquidity, margins and performance still dominate the scene, the industry should pay heed to growth possibilities emerging around the globe.
TowerGroup believes that FSIs need to catch up with structural shifts occurring within and outside the industry. As IT budgets have become more constrained, FSIs must consolidate and rationalize technology resources to free up investment capacity for vital projects.
“The present upheavals will cause the insurance industry to revisit capital adequacy and liquidity,” Kopp says. “As the regulatory framework enters a new phase of government support and accountability to the public, agencies globally will push the envelope in mandates such as Solvency II, and further extend the demands for reserves and disclosure. Beside raising capital, insurers will need to retool their business intelligence, risk management and financial reporting systems.”
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