Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the March 18, 2008 issue of the Bangkok Post.
By Noel Ashpole
Climate change, longevity, increased competition, and too many rules: the global insurance industry is facing its biggest challenges yet.
In a recent survey by the Centre for the Study of Financial Innovation (CSFI) and PricewaterhouseCoopers, 139 industry professionals from 21 countries (including Thailand) were asked to identify their main concerns over the next two to three years. The top 10 risks identified were as follows:
1. Too much regulation: The rising burden of regulation emerges as the greatest risk facing the insurance industry. The steady flow of new laws and rules is piling costs on to insurance companies, stretching their resources and diverting management from running the business.
Among the specific concerns were the sheer volume of regulatory changes, the questionable quality of the regulation, the lack of consistency in rules, and the EU's new Solvency II capital regime for insurance.
Similar issues exist for Thailand, as the issuance of the revised insurance acts in February 2008 will eventually result in the introduction of a risk-based capital system, which will inevitably be followed by changes in accounting standards.
2. Natural catastrophes: The sharp rise in catastrophic events, such as avian flu, tsunamis, hurricanes and floods, put this concern high on the lists of risks, particularly for the property and casualty, and reinsurance sectors. The issue is not merely the growing number of events, but the industry's ability to price the risks and manage them.
For Thai insurers, there is the continued need to train and retain local expertise to be able to assess these risks and ensure appropriate pricing. The existence of adequate insurance cover is key to many insurers.
3. Management quality: The perception that insurance management may not be up to the challenges facing the industry emerged strongly from the survey. Weaknesses cited by our respondents included poor adaptability and strategic vision, low calibre personnel, and the failure of the industry to attract new talent. As with over-regulation, this concern was geographically widespread, being cited as a problem in a number of countries, including the UK, the US, Southeast Asia and Australia.
In Thailand, the lack of qualified personal was specially mentioned by our respondents, who saw staffing difficulties worsening as the industry failed to replace an ageing workforce or attract more qualified people.
4. Climate change: Climate change was the second top concern for the property and casualty sector, and was seen overall by our respondents as the fastest rising risk. Aside from the risk of loss, many respondents focused on the uncertainties surrounding this area, as well as the quality of the industry's response.
5. Managing the cycle: The ups and downs of the insurance cycle are a major challenge for the property and casualty, and reinsurance industries, particularly now that the market is softening again. Declining premiums, plentiful capital and the possibility of a global economic downturn all threaten insurance company performance.
6. Distribution channels: The high cost of traditional distribution channels, and the emergence of new web-based means of selling products pose risks to established ways of doing business, particularly the commission-based distribution system in the UK life market. Many respondents expected to see a big shake-up of distribution structures.
7. 'Long-tail' liabilities: Long-tail liabilities (claims that crystallise after a long period) continue to pose a challenge to insurers, particularly as regards pricing. Some respondents saw this risk in terms of poorly drawn contracts that allowed liabilities to drag on.
8. Actuarial assumptions: The industry's adherence to the pronouncements of actuaries was widely seen not only as the cause of poor insurance decisions, but also as a sign of its obsolescence.
Several respondents made the point that the accuracy of actuarial assumptions will become more critical in the period ahead as the insurance industry enters a softening market.
9. Longevity assumptions: As people live longer, longevity risk for health care and life insurers is rising. The focus of many responses was the impact of longer life on the savings side of the business, annuities and pensions, and insurer's ability to fund their obligations.
10. New types of competitors: Insurance is under attack from new competitors on many fronts. On the wholesale side, hedge funds and venture capitalists are creating new capacity, and investment banks are inventing new risk management products. On the retail front, banks are eating into the savings market, supermarkets are selling insurance, and the internet is providing a platform for electronic distribution channels and price aggregators (websites that collect and compare prices).
It is not merely the fact of new competition that causes concerns, but also its potentially low quality. Many respondents felt new competitors might fail, causing losses and bringing the industry into disrepute.
What's ahead? After being asked to identify the risks, the respondents were asked how well they thought insurance institutions were prepared to handle them. More than three quarters replied ''mixed'', while 21% answered ''well'' and 9% answered ''poor''.
Many of these concerns are relevant to the insurance industry in Thailand and appropriate responses should be developed by both individual insurers and the regulators.
It is important that the development and implementation of solvency and reporting standards that meet international standard are introduced. This will allow insurance companies to plan for the changes in systems and processes that enable them to meet the higher standards, as well as any capital requirements that may be needed.
In conjunction with this, insurers need to ensure that their strategic objectives are clear and that appropriate KPIs and adequate management reporting processes are in place to measure their performance.
The above report is based on the CSFI report, in association with PricewaterhouseCoopers, Insurance Banana Skins 2007: the CSFI's Survey of the Risks Facing Insurers
