Declining morality a big challenge to insurers
One of the main challenges the insurance industry faces in coming years is the “declining morality of our society,” said Mike Hofmeyr, chairman of Willis South Africa. He was speaking at the recent Insurance Institute of South Africa (IISA) Annual Conference 2009 that took place at Sun City on 29 June 2009. The audience of insurance industry stakeholders had gathered to contemplate the way forward in light of the recent economic fallout.
Hofmeyr noted that recessions usually trigger a surge in crime and an increase in social disorder. This is a consequence of the Western system of capitalism which is built around the accumulation of wealth. “Success is no longer defined by what we accomplish, but by what we earn,” said Hofmeyr, adding that “values have become an optional extra!” How does the industry deal with challenges given the current economic situation? Before we attack this question we need to assess how the crisis unfolded.
Financial crisis – cause and effect
According to Hofmeyr the crisis was caused by a number of small things that occurred over a period of time. Industry stakeholders have already started with the difficult task of analysing these causes. Describing the recent fall-out as the equivalent of a ‘perfect storm’ that wiped out almost 45% of global wealth, Hofmeyr asked how the leading financial minds from an array of countries and economic sectors had failed to predict the collapse.
One of the reasons is that the average chief executive was making decisions based on life experience, going back an average of around 30-years, to 1980. But to get to the root cause we must look at the human psyche. Investors are blinded by sentiment. While stock markets were running nobody wanted to entertain the possibility of a collapse. Anyone who predicted a market crash was widely scorned. This ‘failure’ shone through in every aspect of the corporate world. As example, consider the demise of oil-giant Enron. Ratings agencies carried an ‘investment grade’ rating on that company just five days before its collapse.
According to Hofmeyr there were at least two people who predicted the pending disaster. One was Adam Smith – and the other – Nassim Nicholas Taleb. Smith – the founder of modern economic theory – warned of the dangers nearly 200 years ago. Taleb wrote The Black Swan in 2007. His book investigates various events, like the 911 Twin Towers terrorist attack, that he says are too unique to tabulate using historic data. “We have a latent unwillingness to consider worst case scenarios,” said Hofmeyr. For those of us who were caught off guard by the speed and extent of the financial fallout, Hofmeyr joked: “bankers have been telling us for the last ten years that we’re heading for a cashless society.”
Rebuilding the industry
Insurers will face some serious claims in the wake of the crisis. Businesses recovery plans will have to take cognisance of a number of ‘new’ constraints. It’s going to take time to restore the capital wiped out by falling equity markets. Hofmeyr says insurers will have to focus on optimising returns on existing capital because new capital is in short supply, and when available, prohibitively expensive. This capital focus will require greater underwriting discipline and strictly enforced underwriting practices. Under current market conditions insurers are likely to extend less cover, offer fewer extensions and pay closer attention to the declarations of asset values and the valuation of consumer assets. The bottom line is that premiums are likely to increase as a result of these strategic pressures.
Global insurers have emerged from the financial contagion better than some banking and financial services companies. “The insurance industry is intact and, in truth, is looking pretty good,” said Hofmeyr. Management has to identify and exploit the many positives that accompany recessionary business conditions. A good starting point is to remember that “insurance is the DNA of capitalism – nothing happens in the business world without insurers!” It’s also common cause that “turmoil breeds opportunity.” A major external event often reveals areas where a particular business process can be improved.
“Risk managers have never been more important than today,” said Hofmeyr. He noted that organisations will have to pay close attention to their balance sheets in coming years. And that means a focus on risk, risk management and the appropriate application of capital.
What does the future hold?
People learn from their mistakes. Each setback is followed by a recovery that leaves us stronger. Societies and economies are similar. The world will thus emerge stronger from the latest round of recession, but with a few extra scars. “As an industry we are creative and resilient and we will emerge from the crisis stronger than before!” said Hofmeyr. Local financial professionals should use the lessons learnt over the past 18 to 24 months and apply them to the IISA conference theme of pride (professionalism, research, insurance, development and education).
“The future is not – has not ever been – and never will be an extrapolation of the past,” said Hofmeyr. Instead, it lies in the realm of uncertainty. He believes the insurance industry is among the most resilient in the world, and that it will emerge stronger from the crisis than ever before.
Editor’s thoughts:
Greed was at the heart of the recent financial crisis. Banking and financial services executives pursued reckless financial instruments, forsaking sensible risk management policies for profit. Apart from pumping in billions of dollars in bailout packages, most Western economies have proposed tougher regulation and banking system oversight to prevent future implosions. Will we experience another financial crisis (similar in magnitude to ‘sub-prime’) in the future? Add your comments below, or send them to [email protected]
