The global insurance industry’s ability to confront structural and technological changes is now the greatest risk it faces, according to a new survey of insurers and close observers of the sector, released on Tuesday.
The Centre for the Study of Financial Innovation’s (CFSI) latest Insurance Banana Skins 2017 survey, conducted with support from PwC, surveyed 836 “insurance practitioners and industry observers” in 52 countries, including 38 in Canada and 23 in the United States, to find out where they saw the greatest risks over the next two to three years. The breakdown by type of respondent was non-life at 29%, life (27%), composite (17%), reinsurance (7%), brokers (4%) and other (16%).
The survey identifies the risks, or “banana skins,” facing the global insurance industry in the first half of 2017. Respondents were asked to score each of the 22 topical risk in the survey from 1 to 5, where 5 is the most severe. Change management is at the head of a cluster of operating risks which have jumped to the top of the rankings. “The report raises concerns about the industry’s ability to address the formidable agenda of digitization, new competition, consolidation and cost reduction it faces, especially because of rapidly emerging technologies which could transform insurance markets, such as driverless cars, the ‘Internet of Things’ and artificial intelligence,” PwC said in a statement.
Cyber risk follows close behind, with anxiety rising about attacks on insurers themselves as well as the costs of underwriting cybercrime. Other major concerns include the adequacy of insurer’s internal technology systems and new competition, particularly from the ‘insurtech’ sector.
Concerns over ‘Brexit,’ the United Kingdom (U.K.)’s decision to leave the European Union (EU), was at the bottom of the risks (number 22).
After the technology risks (3), the next cluster of high-ranking risks, interest rates, investment performance and macro-economic risk, shows that concern about economic instability remains high. “Although respondents acknowledged signs of growth, confidence in the recovery is not strong for reasons as widely dispersed as the slowdown in China, the risk of Trump-era protectionism, and populism in Europe,” the statement said. “The risk of political interference was seen to have risen sharply. However, Britain’s exit from the EU was seen to be a minimal source of risk for insurers, particularly those without operations in the U.K.”
Regulatory risk, which has topped the last three editions of this survey, has fallen out of the top five this year, PwC reported. This is largely because recent regulatory changes are settling in to “business as usual” (for example, Solvency 2), though the cost and complication of regulation continue to be a concern, the statement noted.
The report also shows that the industry’s ability to attract and retain human talent is a fast-rising concern, particularly to handle the digital challenge. Conversely, an area of declining risk is the governance and management of insurance companies. These were seen as high-level risks during the financial crisis but have fallen sharply since, because of both initiatives from the industry itself and regulatory pressure.
Overall, the climate for insurers is becoming more challenging, according to respondents. The 2017 index, which measures the level of anxiety in the industry, is at a record high, while the industry’s preparedness to handle these risks has fallen from 2015.
“For the first time in six editions of this survey, operating risks pose the greatest threat to insurers,” said David Lascelles, survey editor, in the statement. “Structural and technological changes to the industry could upend traditional business models. At the same time, insurers are grappling with a very difficult economic climate, which helps explain why anxiety is at an all-time high.”
The survey is the latest in the CSFI’s long-running Insurance Banana Skins series on financial risk. Previous Insurance Banana Skins surveys were in 2007, 2009 2011, 2013 and 2015. The report is prepared by the CSFI, which is solely responsible for the editorial content, with support from PwC.
The CSFI is a non-profit think-tank, founded in 1993, which looks at challenges and opportunities for the financial sector. It has an affiliate organization in New York, the New York CSFI.
PwC is a network of firms in 157 countries with more than 223,000 people committed to delivering quality in assurance, tax and advisory services.