Regulation ranks as top risk for global insurance professionals

New regulations introduced at the international and local levels are seen as the greatest risk to the insurance sector, according to a new report from PricewaterhouseCoopers and the Centre for the Study of Financial Innovation.

 New rules around solvency and market conduct could “swamp the industry with costs and compliance problems,” according to the 2013 Insurance Banana Skins Survey,  which polled about 600 insurance practitioners and industry observers in 54 countries to find out where they saw the greatest risks over the next two to three years.

Regulatory changes could also mean a distraction for management, PwC notes.

This is the second Banana Skins survey in a row (the previous one conducted in 2011) that has identified regulation as the top risk concern for the industry.

The European Union’s Solvency II Directive is the major concern in terms of regulation, according to the report, especially as many non-EU countries are waiting on the outcome before they finalize their own regulatory plans.

“It is ironic that the industry’s greatest risks are seen to come from regulation, which is intended to reduce risk, at a time when operating and underwriting conditions are also very hard,” noted the survey editor, David Lascelles. “It is no surprise that these pressures are reflected in rising concern about the ability of management to handle them.”

Uncertainty around the state of financial markets and the world economy were the No. 2 and No. 3 concerns among those surveyed. Risks around business practices, another area of regulatory scrutiny, and the risk natural catastrophes pose to the industry rounded out the top five concerns.

However, several risks have declined in their urgency, the report notes. Concerns around the availability of capital to sustain the industry has dropped since 2011, as have human resources concerns.

A breakdown of the insurance industry by sector shows the life side specifically concerned about the impact of low interest rates on investment performance, and the task of managing complex and competitive retail distribution networks.

On the non-life side, the main concerns are with excess capacity and competitive pricing, along with the impact of surging catastrophe claims. Concerns in the reinsurance sector are mainly with the security of capacity in a highly competitive market.

The full risk rankings, according to the survey, with their 2011 rank included, are:

• Regulation (1)
• Investment performance (4)
• Macro-economic environment (3)
• Business practices (18)
• Natural catastrophes (5)
• Guaranteed products (-)
• Quality of risk management (15)
• Quality of management (14)
• Long tail liabilities (7)
• Political interference (11)
• Distribution channels (9)
• Actuarial assumptions (12)
• Innovation (-)
• Reputation (16)
• Change management (-)
• Capital availability (2)
• Corporate governance (8)
• Climate change (20)
• Human resources (6)
• Product development (24)
• Social media (-)
• Crime (22)
• Complex instruments (19)
• Reinsurance (21)
• Back office (17)
• Pollution (25)
• Terrorism (23)

“Once again regulation is the number one risk,” said David Law, the global insurance leader at PwC. “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,” he noted.

“But there’s a risk that by solely focusing on these recurring issues insurers could miss other threats and opportunities coming up over the horizon,” Law added.

“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 profitable business.”