International insurers reveal industry stumbling blocks

It is always interesting to further one's understanding of threats and opportunities in the international insurance environment. The recently released "Insurance Banana Skins 2007" report is extremely useful in this regard. The report is the inaugural survey of the risks facing insurers worldwide and was produced by the Centre for the Study of Financial Innovations (CSFI) in association with PricewaterhouseCoopers. Although not exhaustive, the survey includes responses from no less than 139 participants in 29 countries. Industries surveyed include life insurers, re-insurers, the property and casualty sector and brokers.

Brokers made up 6% of the respondents and were mainly concerned with management of insurance companies. Their concern with "the growing use by insurance companies of complex instruments" is not inconsistent with the views of insurance brokers and intermediaries practicing in South Africa. It was also interesting to note that this group was less concerned with the impact of regulation than other groupings.

A more significant 34% of responses came from life insurers. Major concerns raised by insurance companies included threats from competitors in savings markets and the impact of retail sales practices on commission business. Of all respondents, this group showed the most concern with regulatory intervention. Life insurers were also concerned with business risks such as interest rates, equity market performance and policyholder longevity.

Top three insurance industry concerns

The CSFI survey reveals no less than 33 global insurance concerns. There is not enough space in this newsletter to tackle all of them. Instead we will take a quick look at the top three industry concerns before mentioning one or two of the risk further down the chart.

Regulation occupies the top spot in this survey. The majority of respondents are concerned that there is simply too much regulation in the insurance industry. Some anomalies exist between first and third world markets with respondents from some countries raising concerns over the quality rather than quantity of regulation. Stakeholders in the South African financial services market are fully aware of the impact of legislation and regulation.

Second place goes to natural catastrophes, including pandemics. Concerns about the possible impact of a global pandemic such as avian flu or natural disasters caused by tsunamis, floods or earthquakes make an obligatory appearance. Most insurers are worried about the possibility of a combination of catastrophic events in the same year. Insurance risk is also heightened by increased urbanisation and rampant population growth in high risk areas. Consider the possible impact of a natural disaster occurring along South Africa's highly developed coastal regions.

The bronze medal goes to concerns over management quality. FAnews Online has posted quite a few newsletters and articles discussing the impact of skills shortages on the South African financial services industry.  And while chairman of the Commission for Employment Equity Jimmy Manyi may prefer to keep his head in the sand, the survey confirms the skills availability problem. We can draw some comfort from the fact that this problem is a global one, and not just limited to our shores. International respondents said the problem was with "finding enough people and keeping them motivated in an increasingly regulated environment." Countries which sited the lack of skills as a problem included Portugal, Italy, Canada, Thailand, Bermuda, New Zealand and Australia.

Climate change remains a major concern

Other issues featuring high on the Insurance Banana Skins list include climate change, managing the insurance business cycle, distribution channels and longevity assumptions. Climate change has been extensively discussed in recent times and concerns in this category relate to the catastrophic weather events which occur on the back of increasingly unstable climatic conditions.

The distribution channel threat is quite appropriate to the South African insurance environment too. Respondents to the survey reveal a twin threat to traditional distribution methods of direct web-based and retail selling. South African insurance companies will also count the impact of Banc assurance in this category.

It appears the European respondents were largely concerned with the continuing reduction in profitability in the commission-based distribution channel. South African insurers are probably a few years behind the European companies in this regard; but with new commission regulation in the life industry not far off, this concern will probably manifest locally in the not too distant future.

Corporate governance remains an issue

The concerns at the lower end of the list make for some interesting debate. These issues would probably feature earlier if the mix of participants (by country and industry area) were different. If this was a purely South Africa survey we are sure the risk attached to corporate governance would rank higher than twenty third.

In this category, brokers are concerned about product complexity, transparency in pricing and performance and accountability for product flaws all contribute in this area. Insurers, on the other hand, take issue with the raft of financial reporting requirements which make their annual reports more difficult to produce and understand. An example of the difficulties faced by insurers was revealed in Sanlam's half year results. The company was forced to discuss some of its views on IFRS reporting standard, and present some numbers with the IFRS impact stripped out.

We also believe that fraud would make an earlier appearance than thirtieth on the list. Most of the respondents in the Insurance Banana Skins survey believe that they have fraud under control. However, some concerns were raised about increasing use of technology in fraud. Such instances include the hacking of insurance databases and breach of consumer privacy. South Africa probably shares worries in this regard. South Africa also suffers from a high "claims culture" among the insured public.

The Insurance Banana Skins 2007 report raises a number of industry challenges for further debate. It is up for the industry to take up the challenge and debate and find solutions to those items on the list that are under human control.

Should you wish to read the full report you may click here to download the 2MB PDF file.

Editor's thoughts:
The Insurance Banana Skins 2007 report lists over-regulation, natural catastrophes, management quality, climate change and managing the business cycle as the top five insurance industry concerns for 2007. Which of these issues are most relevant to the South African insurance industry? Send your comments to gareth@fanews.co.za