London - Regulatory overkill is the greatest risk facing the global insurance industry, according to London-based Centre for the Study of Financial Information's (CSFI) latest Banana Skins survey, in association with PricewaterhouseCoopers (PwC) LLP, New York. 

PwC has provided longstanding support for the CSFI's Banana Skins surveys in the banking sector and thereby recognized that a similar study of risks in the insurance industry was a natural extension of the series.

Top Ten Insurance Banana Skins 2007

  1. Too much regulation
  2. Natural catastrophes
  3. Management quality
  4. Climate change
  5. Managing the cycle
  6. Distribution channels
  7. Long tail liabilities
  8. Actuarial assumptions
  9. Longevity assumptions
  10. New types of competitors

More than 100 respondents to the survey say that excessive regulation is endangering the industry by loading companies with costs, distracting management and creating barriers to competition and innovation. This finding is linked to concern about growing political interference, particularly in markets where governments regulate insurance products and prices.
Over-regulation is widespread. With responses from 21 countries, the survey shows it to be a major issue in North America, Europe, South Africa and the Asia Pacific region. By sector, concern is strongest among life insurance companies, followed by the property/casualty sector. The survey quotes the chief executive of a major UK life insurer as saying: "Regulation is becoming ever more intrusive, time-consuming and box-ticking. This is despite the rhetoric about principles-based regulation." More than 80% of the insurance industry respondents were senior executives or directors.

The survey is the first in the CSFI's long-running Banana Skins risk series to focus on the insurance sector. The result matches the finding of the CSFI's last survey of the banking industry (2006), where over-regulation emerged as the top risk for the second year running.

"Over-regulation is clearly a major issue for a large part of the finance sector, not just banking. It also appears to be a global phenomenon," says David Lascelles, the survey's editor.

"The focus on regulation will only increase over the next few years, as insurers face a number of new demands, not least the coming overhaul of financial reporting and Solvency II, the planned regulatory framework for European insurers which aims to map the regulatory capital requirements of each company against its individual risk profile," adds Mike McColgan, Partner and Metro Insurance Leader, PricewaterhouseCoopers. "A key challenge is to develop effective risk management systems that can provide both compliance and also improved business execution."

Other high-level risks identified by the survey include natural catastrophes and climate change, where insurance losses for the property and casualty sector are rising fast, particularly in heavily populated areas. The main risks facing the life insurance industry include growing human longevity and the soundness of assumptions going into the pricing of life policies.

The survey was conducted at a time when the traditional cycle in the property/casualty market is turning down. Respondents say that insurers are striving to maintain revenues by taking on extra risk, cutting prices and loosening the wording of insurance contracts. This raises concerns about the profitability of the industry, and the risk that insurers will be exposed to "long tails"—insurance risks that could take years to materialize.

The quality of management in the insurance industry is also a major source of concern. Responses to the survey show widespread doubts about the industry's ability to meet growing challenges from regulation, new competitors, technological change and product innovation. The industry is also seen to be failing to attract new blood because of an image problem.

Like regulation, the management issue is geographically widespread.

One of the operational challenges facing the industry is the modernization of back office systems and technology. Too much of the industry is technologically obsolete, even paper-based, which ties its hands when competing with new entrants into the business: better equipped banks and Internet-based suppliers.

The survey also shows which risks are seen to be receding. Notable is asbestos, once the scourge of the industry, now at the bottom of the list with insurers feeling it is manageable. The problems of under-regulation are also low down the list, though it is felt that several emerging markets need better controls.

Although the survey exposes some potentially worrying risks, it also brings better news about the industry's preparedness. Only 3% of respondents think insurers are "poorly" prepared to meet the risks that lie ahead. Just over 20% answer "well" and the rest give a mixed response.

The Insurance Banana Skins survey was conducted in February and March 2007 and is based on 139 responses from 21 countries.

The breakdown, by type of respondent, is as follows:

  • Brokers                   6%
  • Life insurance           34%
  • Property & casualty      35%
  • Reinsurance              14%
  • ObserversSource: PR Newswire  

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