• Insurance banana skins



    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.

    The Center for the Study of Financial Innovation’s (CSFI) latest Insurance Banana Skins 2017 survey, conducted with support from PwC, polled 836 insurance practitioners and industry observers in 52 countries to find out where they saw the greatest risks over the next two to three years.

    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 that it faces, especially because of rapidly emerging technologies that could transform insurance markets, such as driverless cars, the ‘internet of things’ and artificial intelligence.

    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.

    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 have 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 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 UK.

    Regulatory risk, which has topped the last three editions of this survey, has fallen out of the top five this year. This is largely because recent regulatory changes are settling in to business as usual (e.g., Solvency 2), though the cost and complication of regulation continue to be a concern.

    The report 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 Banana Skins 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.

    From the 12 responses from the Philippines, the greatest concern, as in much of the world, was the industry’s ability to manage structural and technological change. Elsewhere, however, there were notable differences from the global rankings. Respondents in the Philippines emphasized governance risks, with the quality of management, business practices and quality or risk management all in the top 10 (though there was little in the comments to explain these rankings). They were also much more anxious than many other respondents about the threat to the industry from reputational damage and social media. Lower down in the table were economic and public environment risks, while cyber risk was also seen as a more moderate threat than it was globally.

    David Lascelles, survey editor, said: “For the first time in six editions of this survey, operating risks pose the greatest threat to insurers. 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.”

    Mark Train, PwC Global Insurance Risk Leader, comments: “Both the challenges and opportunities presented by change underline the vital importance of being clear about where you’re best able to add value, and then being ruthless in targeting investment and management time at these priorities. A key part of this ‘fit for growth’ strategy is differentiating the capabilities needed to fuel growth, ‘good costs’ targeted for investment, from low-performing business and inefficient operations, ‘bad costs’ targeted for overhaul or elimination.”

    Zaldy Aguirre is an assurance partner and accounting consulting services co-leader of Isla Lipana& Co./PwC Philippines. Email your comments and questions to markets@ph.pwc.com. This content is for general information purposes only, and should not be used as substitute for consultation with professional advisors.



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