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Regulation seen as greatest threat to insurance sector

By Benn Bathgate

Thursday 2nd June 2011

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Regulation poses the greatest threat to the insurance industry, according to a new global survey which ranks insurance sector risk.

The third Insurance Banana Skins survey, conducted by the Centre for the Study of Financial Innovation (CSFI) and PricewaterhouseCoopers, found global insurers ranked regulation ahead of capital and macro-economic trends as the biggest challenge facing the industry.

"The most striking finding in this, out third Insurance Banana Skins survey, is the virtually unanimous conclusion that regulation is the biggest threat the industry faces," said CSFI director Andrew Hilton.

"My initial reaction was that this reflected dissatisfaction with Solvency II - which, as another CSFI report has pointed out, seems to have been written with the life insurance industry in mind, no matter what the collateral damage to the general insurance industry. But, in fact, the unease about regulation is more widely spread. It tops the list of concerns for virtually everyone, except, or course, regulators themselves."

The global survey included 15 responses from New Zealand and a breakdown of respondents by type revealed 29% were from the non-life sector, 28% life and the remaining responses from reinsurance, brokers, the London market, regulators, reinsurance and composite.

The survey also revealed the top concerns across each insurance sector.

The life market reflected the wider industry concerns, with regulation the main concern followed by capital and macro-economic trends.

"The life insurance industry faces big regulatory changes; a tougher solvency regime, and new regulations on the sale and distribution of life and savings products. There are concerns about its ability to handle this huge agenda," the report said.

"At the same time, investment markets are difficult because of low interest rates and economic uncertainty. There are also longer term questions about the viability of the traditional life insurance savings model. The sector's reputation could do with a polish."

Looking at industry concerns on a regional basis, the Far East/Pacific region is highlighted as a region "hardest hit by recent catastrophes."

"The industry sees its reputation very much on the line in the quality of its response to these disasters. But overriding all these concerns is the scale of regulatory reform being imposed in many countries, and the industry’s ability to manage it while market and claims pressures are so intense."

PwC global insurance leader David Law said that while dealing with regulation presented a "massive challenge" for insurers, there were also reasons for optimism.

"Insurers will need to make sure that the current wave of regulatory change does not distract them from the opportunities ahead. An ageing population and a changing pattern of risk (the recent spate of catastrophes is an unfortunate but telling example of this) give insurers a reason to be optimistic about future profitable growth," he said.

"Companies that move the regulatory burden away from a box-ticking exercise to something that is embedded into their business and used to manage their changing risk profile more effectively will be in the best position to capitalise on the openings ahead."

The top 20 list of insurance banana skins, with 2009 ranking in brackets, is:

1. Regulation (5)

2. Capital (3)

3. Macro-economic trends (4)

4. Investment performance (1)

5. Natural catastrophes (22)

6. Talent (-)

7. Long tail liabilities (10)

8. Corporate governance (17)

9. Distribution channels (16)

10. Interest rates (11)

11. Political risk (18)

12. Actuarial assumptions (9)

13. Managing costs (14)

14. Management quality (13)

15. Risk management (6)

16. Reputation (15)

17. Back office (24)

18. Retail sales practices (25)

19. Complex instruments (8)

20. Climate change (28)

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