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Regulation is insurance industry’s biggest ‘banana skin’ Back  
Too much regulation is the biggest risk facing the global insurance industry, according to the 2007 Insurance Banana Skins survey. Garvan O’Neill says that while risk is clearly at the heart of insurance business, growing compliance and competitive pressures are creating fresh headaches for the industry.
The burden of too much regulation is the greatest risk currently facing the global insurance industry, according to the 2007 Insurance Banana Skins survey, conducted by the Centre for the study of financial innovation, in association with PricewaterhouseCoopers. This survey, the first focusing on the insurance industry, which follows on from a successful equivalent in the banking industry, provides a fascinating insight, based on responses from approximately 140 insurers, brokers and experts across 21 countries and 4 continents, into the emerging and ever-present risks and concerns facing Insurers worldwide. More than 80 per cent of the insurance industry respondents were senior executives or directors.

Respondents to the survey highlighted excessive regulation as endangering the industry by loading companies with costs, distracting management and creating barriers to competition and innovation. This finding is also linked to concern about growing political interference, particularly in markets where governments regulate insurance products and prices.

While concern about over-regulation is geographically widespread, the regulatory focus in Ireland, as in the rest of the EU, has increased and is set to further increase over the next few years. Insurers face a number of new demands, not least being Solvency II (the new ‘risk based’ prudential regime for insurers operating in the EU), which will pose a significant challenge to industry and regulator alike. Solvency II will have a very significant impact on many aspects of an insurer’s business and should not just be seen as a regulatory/compliance or actuarial issue. Therefore, the key challenge facing Irish and EU insurers in the short to medium term is to ensure that their risk management systems enable both compliance obligations to be met and also allow for improved business execution.

Other prominent banana skins at the top of the survey are equally revealing. The threat from natural catastrophes (second ranked risk overall) and associated climate change (fourth ranked risk overall) are prominent. In recent years, Hurricane Katrina, the European floods and other such disasters have resulted in significant insurance losses. Given Ireland’s temperate climate and geographical location, such risks may not be of a significant concern to the relatively small number of insurers concentrating on the Irish non-life domestic market.

However, for the significant number of companies transacting international reinsurance and insurance from Dublin and other locations in Ireland, the risks from natural catastrophes and associated climate change are very real. It is clear that to minimise such losses in the future, the focus of international insurers, and reinsurers in particular, will need to be on careful risk selection, control and diversification.

The quality of management (third ranked risk overall) in the insurance industry was also a major source of concern listed by respondents. Interestingly, this was not even listed within the top 30 concerns identified by the equivalent Banking Banana Skins survey. Respondents agree that the industry is seen to be failing to attract new blood because of an image problem which is restricting the ability to harvest fresh managerial talent. As a consequence, respondents maintain widespread doubts about the industry’s ability to meet growing challenges from regulation, new competitors, technological change and product innovation.

Like regulation, the management issue is geographically widespread. In contrast, a strong feature of the attractiveness of the Irish market has always been the existence of experienced insurance industry professionals which has supported the continued success and growth of the IFSC. Therefore, further investment by the Irish industry to develop and strengthen this market characteristic is completely justified.

‘Managing the cycle’ (fifth ranked risk overall) is considered a major challenge for the property & casualty and reinsurance market, particularly now that the market is softening again. Respondents said 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 materialise. Appropriately, long term liabilities were identified as the seventh ranked risk overall. The Irish industry is not insulated from this global risk and therefore must manage the cycle without chasing the market if it is to avoid disproportionate risk.

The high costs of traditional distribution channels (sixth ranked risk overall) and the emergence of new web-based means of selling products pose many challenges to established ways of doing business, which also equally applies in the Irish context. It is clear that one of the operational challenges facing the industry in general is the modernisation of back office systems and technology. It is accepted that aspects of the industry are technologically obsolete, even paper-based, which ties its hands when competing with new entrants into the business such as better equipped banks and Internet-based suppliers. During the past decade and longer, Ireland has certainly seen the success of these latter operations over the traditional players. Clearly, equivalent new players will continue to enter the market and will succeed in securing market share over the more traditional players who fail to meet the challenge presented.

The main risks highlighted by the survey for the life insurance market include growing human longevity (ninth ranked risk overall) and the soundness of actuarial assumptions, especially going into the pricing of life policies (eighth ranked risk overall). The strong actuarial profession in the Irish market plus the clear reference point in the UK life market helps to mitigate some of the consequence of these risks but by no means eliminates them.

Separately, the survey shows which risks are seen to be receding by respondents. Notably, asbestos - once the scourge of the industry - is now at the bottom of the list with insurers now 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 does expose some potentially worrying risks. Only 3 per cent of respondents think insurers are ‘poorly’ prepared to meet the risks that lie ahead. Just over 20 per cent believe insurers are well placed and the rest give a mixed response. The clear message for insurers, in this ever changing environment, is that they will need capable management and systems that will allow for effective monitoring and mitigating techniques against emerging risks.

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