Regulation has global insurers quaking in their boots
The Insurance Banana Skins 2011 Survey – conducted by the Centre for the study of Financial Innovation (CSFI) in conjunction with PwC – lists regulation as the primary concern among global insurance companies. “The greatest risk facing the insurance industry is the raft of new regulation being introduced simultaneously at international and local levels,” says Victor Muguto, PwC Southern Africa Insurance Leader. “In South Africa the combined effect of the Solvency Assessment and Management (SAM), Twin Peak Prudential and Market Conduct proposals are significant examples.”
The survey was conducted between March and April 2011 and includes views from 490 respondents from 40 countries, including four from South Africa. Non-life insurers (29%) and life insurers (28%) comprised the bulk of respondents, though re-insurers (7%), brokers (6%) and regulators (2%) also had a say. They were asked to describe their main concerns over the next two to three years, rank a list of potential ‘banana skins’ and consider the preparedness of the industry to deal with risks.
No surprises – regulation occupies the top seat.
The regulation issue has crept up from fifth on the Banana Skins 2009 survey to first today. It emerges from the survey that insurers struggled in the post-recession environment. Although banks were largely responsible for the global financial contagion it did not take regulators long to realise that insurers held massive amounts of investor capital – and that their use of this capital needed to be monitored and controlled. The feeling is regulation could swamp the industry with cost and compliance problem.
Top of mind for global insurers is the European Union’s Solvency II directive which must be implemented by year-end 2011. This legislation has been in the pipelines for 14-years but has been influenced by recent financial market events. South African insurers are struggling with their own version of Solvency II, namely SAM, which is being fast tracked for 2014. Many industry stakeholders are uncertain whether this tight deadline will be met.
Despite their lengthy and complex implementations, Solvency II and SAM create as many new problems as they solve. One of the industry’s main concerns is with the cost of regulatory compliance. A second is with the liquidity crunch which could follow from the stringent Solvency II capital requirements. The survey’s largely European respondents also objected to the fact that the United States and Far East would enjoy an advantage over their global competitors due to similar regulations not being implemented there.
Capital crops up in second place
Capital climbed from third (2009) to second in the latest survey. European insurers were extremely concerned with the availability of capital to meet tougher regulatory requirements. At the moment there is too much capital creating a soft market, but Solvency II will mop this capital up!
Macro-economic trends make it to number three on the latest list of insurance ‘banana skins’. Insurers are concerned with the generally weak recovery in the global financial and economic environments because they rely on a strong consumer-led economy for new business. Instability in the Middle East North Africa (MENA) region and sovereign debt and austerity concerns in Europe are stirring this uncertainty. The challenge for insurers is how to grow their respective businesses – and profitability – in an environment where credit extension and discretionary income growth remain stagnant. Apart from growth concerns, survey respondents were particularly worried about the resurgence of inflation, commenting: “the future course of inflation is unknown and dangerous!”
Risk four and 10 are direct consequences of the recession. Insurers are concerned about investment performance (position four) and interest rates (position 10). The first of these concerns has abated since the 2009 survey, when investment performance was identified as the top concern! But interest rates remain extremely low in developed economies worldwide, making it extremely difficult to generate returns. In the UK additional regulations limiting the type of assets an insurer can invest in has further impacted investment return. PwC observes it is almost impossible for life insurers to offer capital guarantee products in the current environment.
Japanese quake influences survey outcome
The big mover among the top 10 industry risks is natural catastrophe, which climbed from 22nd in 2009 to fifth today. The survey was conducted in the wake of the Japanese quake / tsunami, New Zealand quake and Australian flooding. “It seems as if the industry is suffering a ‘one in a hundred year event’ every six months,” quipped one respondent. Mark Claasen, PwC SA Actuarial & Insurance Management Solutions Leader, observed that modern day insurers faced significant concentration risk in both value of insured property and population. Other top 10 risks include talent (sixth), long-tail liabilities (seventh), corporate governance (eighth) and distribution channels (ninth).
The insurance industry comprises a complex mix of stakeholders. The Insurance Banana Skins 2011 survey shows that the life insurers are concerned with the impact of low interest rates on investment performance and the task of managing complex and competitive retail distribution networks. On the non-life front stakeholders are worried about excess capacity and competitive pricing, as well as dealing with catastrophe claims. And the reinsurance sector is struggling with the security of capacity in a highly competitive market.
Editor’s thoughts: Although there were only four South African (and two African) respondents in the survey it seems our industry largely ‘mirrors’ the concerns raised by the Europeans. Do you think the European insurance sector offers a reasonable proxy for the South African business? Please add your comment below, or send it to gareth@fanews.co.za
