Banana Skins' poll reflects industry risk perception
14/03/16
According to ‘Insurance Banana Skins 2015’, a new survey charting risks in the global insurance sector, concerns about macro-economic conditions and interest rates have overtaken regulation as the biggest risks facing insurance companies in Central and Eastern Europe.
Insurance Banana Skins 2015
(2013 ranking in brackets)
- Macro-economy (3)
- Interest rates (n/a)
- Guaranteed products (14)
- Business practices (2)
- Regulation (1)
- Investment performance (5)
- Cyber risk (n/a)
- Distribution channels (16)
- Climate change (22)
- Change management (17)
- Natural catastrophes (6)
- Quality of risk management (8)
- Product development (20)
- Corporate governance (19)
- Quality of management (11)
- Market conditions (n/a)
- Long tail liabilities (10)
- Social change (n/a)
- Human talent (12)
- Reputation (9)
- Capital availability (18)
- Political interference (4)
- Terrorism (27)
- Complex instruments (25)
- Pollution/contamination (26)
Source: CSFI (Insurance Banana Skins 2015)
Applying the findings of Insurance Banana Skins 2015 to Latvia, Girts Kronbergs, PwC Consulting Manager and Insurance Leader, said:
“We have seen significant changes to the risk profile of insurers in Central and Eastern Europe (CEE) since Insurance Banana Skins 2013. Compliance with regulations governing the industry is no longer among top risks in Latvia, mainly because the risk management and control environment is now better integrated with overall governance processes as a result of Solvency II implementation. However, the EU keeps coming up with more and more regulatory requirements for the banking, financial services and insurance industry that are likely to determine the future of insurance products and their supply channels, and so regulation is expected to rank among the top risks affecting insurers in Latvia. Insurance Banana Skins 2015 also identifies the macro-economic factor as a top risk in CEE and Latvia, which has largely been the catalyst for an increase in other related risks since 2013—risks arising from low interest rates, difficulty maintaining the profitability of guaranteed products (particularly in life insurance with contracts based on more optimistic macro-economic forecasts), lower investment performance, and so on.”
G. Kronbergs calls attention to the impact of technology and data security risks that insurers need to address: “A key trend that follows from this study and applies globally as well as in CEE and Latvia is the increasing digitisation of the insurance sector, which makes insurers more accessible while they undertake to govern associated cybersecurity and data governance risks. Latvian insurers are paying inadequate attention to data governance risk, with a lot more effort going into the mitigation of technology risk in the digital environment. As data forms the basis for developing your products and understanding the needs of your customers, data governance should indisputably be part of your corporate governance processes.”
Top risks
Not surprisingly, macro-economic risks have risen to the top of the list of business threats to insurers. The economic outlook continues to be uncertain as markets in Central and Eastern Europe are adversely affected by the Eurozone crisis in the west and geopolitical uncertainty in the east. The macro-economic environment has a major impact on the demand for insurance products and their profitability. Insurers are reacting by reducing operating costs and focusing on the profitability of business.
The persistently low interest rate environment was seen as a more severe threat in Europe than any other region. This risk was a new entrant in this year’s survey and debuted in the number 2 position in CEE and number 3 globally. As a result, insurance companies are struggling with lower investment performance, which in turn adversely affects overall financial results. Furthermore, insurers which offered savings products with guaranteed returns when interest rates were high back in the 1990’s are now facing losses because insurers cannot earn high enough returns to fund the liability.
Artur Pikula, Insurance Leader for PwC in Central and Eastern Europe comments: “The adverse economic conditions and low interest rates have brewed a ‘perfect storm’ which threatens the investment income which is vital to all insurance businesses, while creating challenges with respect to guaranteed products in life businesses. In combination, these risks threaten to squeeze long-term profit margins. To ensure sustainable success in this environment, insurers need to review their products and investment strategies in terms of both ROI and matching maturities to insurance liabilities. Product innovation will be key to maintaining competitiveness and profitability.”
Regulation is seen as the top risk globally for the third time in a row, and the fifth biggest risk in CEE. Regulation – and in particular the 2016 deadline for Solvency II implementation - is creating additional uncertainty in an already difficult market. Companies are struggling with increased demands and costs of compliance with regulations.
The issue of business practices is very much on the mind of insurers, particularly in relation to unethical sales of life insurance products by intermediaries. In an attempt to address these risks, regulators are introducing consumer protection legislation to provide better oversight over intermediaries and distribution channels - adding yet another dimension to the regulatory compliance burden.
Cyber risk is a growing concern around the world, and has debuted in seventh place in Central and Eastern Europe and in fourth place worldwide. After several high-profile security breaches of health insurance companies in the US, both customers and insurers are worried about the security of sensitive personal data. National regulators have also taken notice and implementing new legislation to assist insurers in managing and mitigating IT risks.
Areas of improvement
Despite escalating economic, regulatory and industry pressures, insurers in Central and Eastern Europe feel more confident in their ability to respond to business risks than they did 2 years ago. According to this year’s Banana Skins survey, the “Preparedness Index” for Central and Eastern Europe rose to 3,18 (out of 5) in 2015, up from 2,93 in 2013.
Artur Pikula explains: “In the 2013 Insurance Banana Skins survey, regulation was considered the highest risk in CEE, mainly due to uncertainty about Solvency II readiness and the related cost/benefit ratio. Since then, we have observed a greater emphasis on managing risk and compliance among insurance companies in CEE. Insurers are investing in good governance, tighter controls, and more secure IT systems. We are very encouraged by the progress made so far, but there is still much to be done. The regulation itself, if taken as more than just a compliance exercise, can help insurers with faster identification and assessment of risks and better risk management. We encourage insurers to take that extra step in the process to get the most out of it.”
About the report
The CSFI’s ‘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 2-3 years. The CEE report is based on 34 responses from the Czech Republic, Poland, Slovakia, Latvia, Croatia, Hungary and Russia.
To download the full global report, go to www.pwc.com/bananaskins. To download the CEE supplementary report, go to www.pwc.pl/en/publikacje.
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