Insurance leaders around the world are more concerned about risks facing their industry this year compared to any other year since 2007, according to a new joint survey from PwC and the Centre for the Study of Financial Innovation.
The Insurance Banana Skins 2019 study, which is carried out every two years, identifies the most urgent risks that insurance practitioners and close observers of the insurance industry around the world see as being of relevance in the next two to three years. The report presents the views of nearly 1,000 insurance practitioners in 53 territories, including Ireland.
The survey finds that the change in sentiment is largely due to the scale of the challenges facing the industry through technological and structural change and concerns about the industry’s ability to manage them successfully. This sentiment should also be seen against a background of growing economic uncertainty around the world and heavier regulation.
“In the Irish insurance market the three “C”s are front of mind: Claims reform, Conduct risk and the level of healthy Competition in the market."
The shifting perceptions are reflected in the ranking of individual risks, the three highest risks form a theme around technological change and the industry response. The top risk, technology, is rooted in concern about the scale of the disruption challenge facing the industry. Closely aligned to it change management (No.3) exposing a high level of concern about the industry’s ability to address the formidable agenda of digitalisation, new competition, consolidation and cost reduction. Cyber risk (No.2) is the second biggest risk, a major issue for the industry as it adjusts to the digital age, both as an operational risk and an underwriting risk.
Regulatory risk at No.4 (up from No.6 in 2017) is seen to be rising strongly, driven by initiatives such as the new accounting standard IFRS 17 and stronger capital and consumer protection requirements. Another fast riser is climate change (No.6) which had not featured near the top of this survey series since 2007. The spate of weather and natural catastrophe events coupled with a renewed consumer and regulatory focus on sustainability and corporate responsibility now makes this an urgent industry concern.
Launching the report, Darren O’Neill, PwC Ireland Insurance Advisory Partner said, “In the Irish insurance market the three “C”s are front of mind: Claims reform, Conduct risk and the level of healthy Competition in the market. However, these are set against the same backdrop of issues that insurers face globally: How do I respond to a rapidly changing, digitally centric world? How do I manage that change? What is next on the Regulator’s agenda?
“This year’s study reveals there is a pressing need for better and more efficient technology. There is no doubt that the evolution of technology and the ability to adapt will be even more critical in a consumer savvy environment. And in the era of digitalisation the threat of cybercrime has become ever more prominent. The emphasis on technology and cyber ought to be a wake-up call.
“We also expect climate change and sustainable development to continue to impact the insurance industry. Evolving sustainably, developing relevant climate friendly products will be critical. These changes bring risks and challenges – areas of focus for management and Regulators alike. They will bring opportunities for greater market competitiveness and more customer centric innovation if they are successfully managed. The early adopters have a better chance of emerging as the winners. Many of the survey’s respondents have operations in Ireland, the survey findings are just as relevant here.”
Regulation (No.4): A heavy regulatory agenda including IFSR 17 and consumer protection increases compliance risks and implementation costs.
Climate change (No.6): The spate of natural catastrophe events has increased the urgency of this risk, and could be undermining insurance pricing models.
Reputation (No.13): Data security, populist politics and ‘declining social relevance’ could all damage insurance.
The impact of political risk (No.11), largely due to growing protectionism and populist policies, could impact both the international and domestic insurance markets through trade wars and deeper interference. It could also aggravate reputation risk, rising to No.13, up from No.17 on the back of concerns about consumer rights, data security and the perception that insurance may be losing its ‘social relevance’.
Respondents were asked how well prepared they thought the insurance industry was to handle the risks they identified. On a scale of 1 (poorly) to 5 (well) the average response was 3.11, up from 3.02 in 2017, suggesting greater confidence about the industry’s ability to weather a difficult business environment.
Ronan Mulligan, Insurance Partner, PwC Ireland, concluded: “Since 2007, the first year of the study, we have seen real growth in new ways of conducting business and reaching customers through a myriad of new channels. The external environment has changed economically, politically and socially. In addition, the regulatory risk has increased to 4th position, up from 6thth position. The heavy regulatory agenda has increased the compliance and implementation burden. The task of addressing new regulatory standards, in a tight timeframe, is proving to be a challenge for insurers everywhere.
“Challenging the status quo and encouraging a move from traditional thinking, attitude and behaviours were suggested as the most effective ways in which the top risks can be managed. The transformation of the industry with this new wave of industrialisation requires diversity in thinking to best capitalise in this market. Despite the changes and risks highlighted, however, the industry’s response to preparedness as a whole has suggested greater confidence in their ability to manage and address these risks.”
About the survey:
Insurance Banana Skins surveys the risks facing the insurance industry, identifying those that appear most urgent to insurance practitioners and close observers of the insurance industry around the world. The 2019 study was conducted in March/April 2019 and is based on 927 responses from 53 territories including Ireland. Three-quarters of respondents were from the primary insurance industry. The remainder were from the reinsurance and broking sectors and non-practitioners such as regulators, consultants, analysts and other professional service providers. Previous studies carried out are 2007, 2009, 2011, 2013, 2015 and 2017.
About the Centre for the Study of Financial Innovation
The CSFI is an educational charity. It has no endowment income. It receives financial and other support from a wide variety of public and private bodies, as well as from individuals.