Category Risk Management

Top risks that continue to linger in the arena

28 September 2016 Myra Knoesen
Victor Muguto, Head of Long-term Insurance, PwC Africa

Victor Muguto, Head of Long-term Insurance, PwC Africa

Myra Knoesen, FAnews Journalist

Myra Knoesen, FAnews Journalist

While emerging markets appear more attractive, many practitioners have faced and continue to face substantial difficulties in carving out profitable positions with the ever changing landscape and the threat of risks that continue to linger in the arena.

With this in mind, the Centre for the Study of Financial Innovation’s (CSFI) Insurance Banana Skins 2015 survey conducted in association with PwC, polled over 800 insurance practitioners and industry observers in 54 countries, to find out where they saw the greatest risks over the next two to three years. There were 35 responses from South Africa, and 42 in total from Africa as a continent.

The survey, which charts the top risks in the global insurance sectorshows that cyber risk and new technologies are now among the top risks for insurers. While tighter regulation was acknowledged as being beneficial to the industry, the survey responses showed that regulation was also widely seen as excessive and overbearing.

Underlining the deep impact

Cyber risk was ranked as the number one concern by insurers in South Africa, the UK, and North America. Regulatory risk emerged as the overall global top risk for participants in the survey for the third successive time, underlining the deep impact regulatory change is having. It has been the top risk in four of the five surveys since 2007. 

The main concerns are that new rules governing solvency and market conduct could swamp the industry with costs and compliance problems. They could also distract management from the task of running healthy businesses at a time when the industry also faces radical structural change.

The EU’s Solvency II Directive was the focus of strongest concern. Other countries around the globe, including South Africa, are also introducing similar measures modeled on Solvency 2.

While the beneficial impact of tighter regulation was acknowledged, the survey responses showed that regulation was also widely seen as excessive and overbearing.

FAnews interviewed Victor Muguto, Head of Long-term Insurance, PwC Africa about these trends and how the industry can move forward in a positive way.

“South Africa has adopted the Twin Peaks model of financial regulation, which will entail separate regulation of the solvency and capital requirements on the one hand and the market conduct aspects of all financial institutions on the other. To regulate the solvency requirements, South Africa adopted the Solvency Assessment and Management (SAM) principles, modeled around the Solvency 2 directive from Europe. This will introduce a risk based way of quantifying the solvency and capital requirements of insurers. The market conduct regulations include Treating Customers Fairly (TCF) among others. These new developments are seen by respondents to our survey as costly, and onerous, given the requirement to implement from 2016,” he said.

In addition, Muguto mentioned that intermediaries may also be impacted by developments such as the Retail distribution Review (RDR) by the Financial Services Board (FSB), among other market conduct requirements.

Adding salt to the wound

Respondents were cautious about the outlook for growth, as well as for interest rates, whose persistent low levels since the financial crisis have depressed investment yields and made savings products more difficult to manage and sell. It was surprising to note that interest rates were seen as less of a concern in South Africa and only ranked 23 compared to three on the global rankings. 

Cyber risk emerged on top of the list for the first time since the survey was initiated in 2007, and was ranked high at number four globally, and number one for non-life insurance, reflecting rapidly growing concerns about cybercrime and data security.

The digitisation of the industry also threatens traditional business models in the areas of distribution, new entrants and client interface. In general there were widespread views that the industry has been slow to keep pace with new technology and was getting left behind by the banking industry.

“As more and more businesses move to online and mobile channels, insurers’ vulnerabilities to fraud and data compromise will continue to increase. It is vital that boards take the lead in evaluating and tackling the issue of cyber risk within their data, processes and systems infrastructure, rather than leaving this to be dealt with by information technology managers alone,” said Muguto.

“In addition, regulation, digital technology, changing customer expectations and competition from new entrants are just some of the disruptive shifts facing insurers. Insurers need to assess the implications of these trends for their businesses and to determine the strategies needed to respond appropriately,” he said.

It must be noted, according to Muguto, that South African respondents fared better than the global respondents in their own assessment of their level of preparedness to deal with the changing risk environment. However, they did rank cyber risk ahead of regulation in their responses.

A positive outlook

“The long-term growth prospects for insurers on the continent are very positive, as more African economies in general are growing, and more people start to accumulate more wealth to protect. Rapid migration into cities and increasing infrastructure spending by African governments are also contributing to the growth in insurable assets and lives. And yet African insurers also face the disruptive impacts of rapidly changing technologies, evolving customer behaviors and expectations and volatile markets added to the increasing regulatory burden. Those insurers who are able to identify and manage these emerging as well as other familiar risks while keeping up with the changing regulatory landscape will differentiate themselves from their competitors,” he said.

“The South African insurance industry has increased its level of participation in the survey, and also confirmed in their own readiness assessment that they can deal with the changing environment. South African insurers are innovative, and will adapt,” concluded Muguto. 

Editor’s Thoughts:
Although the threat of risks continues to grow, we need to prepare ourselves and enforce solutions because embracing change and finding new opportunities is the only way to remain competitive. Are we as an industry keeping up or falling behind? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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