Irish insurance sector more resilient than global industry, PwC survey 'Insurance Banana Skins' reveals

  • State of financial markets, regulation and investment performance are top risks for Irish domiciled insurers.
  • Ireland scores better than world average on level of preparedness to handle insurance risks
    (1= poorly; 5= well).
  World Ireland
Average 2.95 3.27

Ireland scored 3.27, well above the world average on the level of preparedness for insurers to handle insurance risks identified – according to PwC Ireland’s 2013 Insurance Banana Skins survey, launched today.

Speaking at the survey launch, Garvan O’Neill, Leader, PwC Ireland Insurance Practice, said: “The survey confirms that Ireland’s insurance sector feels it is better able to handle insurance risks than their global counterparts as a result of changes introduced by the insurance sector in Ireland over recent years. A key contributor to this is the accelerated introduction of risk and governance structures by Irish insurance companies which was primarily driven by new regulatory requirements. The fact that the quality of risk management and corporate governance is a lesser concern in Ireland than for global counterparts, according to the PwC survey, supports this.”

Top risks for insurers based in Ireland:

PwC’s survey ‘Insurance Banana Skins’ reveals that the top concern for Irish insurers, domestic and international, is not surprisingly the macroeconomic environment which influences both purchasing behaviour and investment returns. This was followed by the impact of new regulatory requirements, a wall of which has hit the industry since the banking and Eurozone crisis (See notes to editor for risk ranking). This has created uncertainty in the industry in terms of regulatory expectations and consequently has resulted in a very high compliance burden. Interestingly, PwC’s recent CEO Pulse Survey revealed that an overwhelming majority (80%) of Irish business leaders highlighted that over-regulation is a key concern for business growth, compared to just 59% for their European counterparts. This is a reflection that a considerable overhaul has taken place in Ireland in recent years where regulation is concerned. Since the financial crisis, Ireland has taken immediate action on the regulatory front, in many cases ahead of our European counterparts, as part of the strategy of re-establishing our credibility in the market place. A small recompense is that many of our European competitors will have to tackle similar changes in the very near future.

The risks arising from poor investment performance scored third on the list of top risks for Ireland, reflecting the broad challenge for insurers to maintain asset values for policyholders and shareholders in a volatile market. Securing value and return for customers is increasingly difficult and makes growth in sales a significant challenge.

Garvan O’Neill added: “The uncertain economic conditions have resulted in reduced spending on insurance-related products in Ireland and internationally (ie higher insurance deductibles and reduced pension and investment premiums) and lower/more uncertain investment returns for the non-life and life sectors. Any recovery will depend not only on improved consumer confidence in Ireland but also on improved conditions in the economies with which we trade. Interestingly, while in a different order, the global top three risks are the same as those highlighted by Irish domiciled insurers.”

Looking across the 27 different ranked risks, some interesting differences emerge comparing the Irish perspective to the global view. The following are some notable differences:

Higher concerns compared to global counterparts Ireland Global
Distribution channels 5 11
Actuarial assumptions 6 12
Innovation 7 13
Reputation 8 14
Climate change 12 18

Lower concerns compared to global counterparts Ireland Global
Quality of risk management 15 7
Quality of management 20 8
Corporate governance 27 17
Human Resources 24 19

These differences very much reflect the key characteristics of the Irish insurance market relative to their international counterparts. For example, much of Ireland’s insurance industry is internationally focused, operating in markets beyond Ireland. Proximity to and influence over the distribution channel is significantly more difficult in such circumstances. Another example relates to actuarial assumptions which scored the sixth greatest concern in Ireland, compared to 12th in the world rankings. The Irish insurance industry for certain types of business, is required to adopt more prudent actuarial assumptions than their international counterparts which makes the business more capital demanding and therefore less competitive.”

Areas of lesser concerns for Ireland, compared to global counterparts, included the quality of risk management; quality of management; corporate governance and human resources. It is positive to see these rankings, as they indicate that, despite the initial pain of implementing new regulatory requirements relating to governance and risk management, the Irish insurance industry is now benefiting from this investment.


Notes to editors:

Ireland insurance Banana Skins risk ranking 2013:

(Global 2013 ranking in brackets)

  1. Macro-economic environment (3)
  2. Regulation (1)
  3. Investment performance (2)
  4. Guaranteed products (6)
  5. Distribution channels (11)
  6. Actuarial assumptions (12)
  7. Innovation (13)
  8. Reputation (14)
  9. Change management (15)
  10. Capital availability (16)
  11. Business practices (4)
  12. Climate change (18)
  13. Natural catastrophes (5)
  14. Crime (22)
  15. Quality of risk management (7)
  16. Political interference (10)
  17. Terrorism (27)
  18. Social media (21)
  19. Complex instruments 23)
  20. Quality of management (8)
  21. Reinsurance (24)
  22. Product development (20)
  23. Back office (25)
  24. Human resources (19)
  25. Pollution/contamination (26)
  26. Long tail liabilities (9)
  27. Corporate governance (17)

Global commentary / analysis:

Wave of new regulation tops global insurance sector risks ‘banana skins’ poll pinpoints key concerns for insurers.

The greatest risk currently facing the global insurance industry comes from the wave of new regulations which are being introduced at international and local levels, according to a new survey which ranks insurance sector risk.

The CSFI’s latest Insurance Banana Skins survey, conducted in association with PwC, says that new rules governing issues such as solvency and market conduct could swamp the industry with costs and compliance problems. It could also distract management from the more urgent task of running profitable businesses at a time when the industry is under stress.

The survey polled over 600 insurance practitioners and industry observers in 54 countries including Ireland to find out where they saw the greatest risks over the next 2-3 years. Regulatory risk emerged a clear leader in many major markets, including North America, Europe, and the Far East/Pacific.

This is the second successive Banana Skins survey which has identified regulation as the top risk concern for insurers, underlining the continuing uncertainty surrounding major regulatory initiatives.

The EU’s Solvency II Directive, now in its seventh year of planning, was the focus of strongest concern, particularly since many non-EU countries are awaiting the outcome before they finalise plans of their own.

A related set of risks lay in the area of business practices (No. 4), another area of regulatory scrutiny. Despite the huge amount that has been done by companies and regulators to clean up practices such as mis-selling, this is still seen as an area of high risk particularly at a time of economic stress when pressure to generate sales is strong.

Other high-ranking concerns revealed by the survey included the uncertain state of financial markets (No. 2) and the world economy (No. 3). These are adding to the pressures on an industry which has been squeezed by years of low interest rates and intense competition. A particular focus of concern was the legacy of products which offer guaranteed returns but cannot be profitably funded at today’s low yields (No. 6).

The continuation of difficult market conditions has also put the spotlight on the quality of management (No. 8), and particularly risk management (No. 7).

This year’s survey showed continuing concern about underwriting risks in natural catastrophes (No. 5) given the greater frequency of events, and the rising cost of claims. In some markets, such as New Zealand and Australia, the insurers’ handling of catastrophe claims has become a major political issue.

On the other hand, a number of risks have fallen in urgency, notably concern about the availability of capital to sustain the industry (down from No. 2 to No. 16). The situation is now reversed: there is excess capital in the industry, particularly on the non-life and reinsurance sides, which is keeping prices soft and hurting profitability. Another receding risk, at least in developed markets, is human resources: the shake-out in the financial services sector has made it easier to recruit and keep good talent. The situation is harder in emerging markets where qualified talent remains in short supply in many markets.

David Lascelles, Survey editor, said:

“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. It is no surprise that these pressures are reflected in rising concern about the ability of management to handle them.”

Garvan O’Neill concluded:

“Once again regulation is the number one global insurance risk. 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.

“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. The industry faces transformational shifts in technology, customer expectations and distribution methods, 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, both existing financial services players and non-traditional competitors (e.g. social media providers, telecoms), to move in and pick off profitable business.”

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.

  1. The Insurance Banana Skins survey was conducted in March and April 2013 and is based on 662 responses from 54 countries including Ireland. The breakdown by type of respondent was:
    Non-life 35
    Life insurance 26
    Reinsurance 7
    Brokers 6
    Observers 26
  2. The survey is the latest in the CSFI’s long-running Banana Skins series on financial risk. Previous Insurance Banana Skins surveys were in 2008, 2009 and 2011. It can be downloaded from the PwC website:
  3. The CSFI (Centre for the Study of Financial Innovation) is a non-profit think-tank, founded in 1993, which looks at challenges and opportunities for the financial sector. It has an affiliate organisation in New York, the New York CSFI.

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