Grim economic outlook tops risk concerns for insurers in Asia
SINGAPORE, 12 March 2009 – The immediate issues arising from the global financial crisis have come to the fore in the latest analysis of risks facing the insurance industry.
“The global financial crisis has brought certain issues such as investment performance, macro-economic issues and risk management into the top flight of risks – it is perhaps more correct to say that these risks have joined rather than replaced the top risk concerns from the same survey two years ago” observes Graham Lee, Assurance Partner, PricewaterhouseCoopers LLP, Singapore.
“In absolute terms, insurers are just as concerned about some of the key risks of the past but they have found they have added matters to worry about” he adds.
Conducted in association with PricewaterhouseCoopers (PwC), the latest Centre for the Study of Financial Innovation (CSFI) Insurance Banana Skins survey reveals that without the stable investment returns that many in the industry have come to depend upon, insurance companies worldwide are facing an uncertain future in what is proving to be the worst business crisis in decades.
The current mood in the insurance industry contrasted sharply from the previous survey in 2007 when the top focus was on operational risks such as too much regulation. That year, market risks barely featured in the top ten – signifying a major shift in risk perceptions due to the crisis.
The Banana Skin polling survey drew over 400 responses from 39 countries, 11 per cent of which were from Asia. The survey shows how respondents rank the risks facing the industry. The poll shows that the views about risk between Asia and globally are fairly consistent. Macroeconomic outlook and its impact on the insurance industry is high on the list of risk concerns in both Asia and globally. Lower business volumes are expected to put strains on profitability and capital in Asia, alongside peers in many parts of the world.
From a global perspective, the quality of the insurance industry’s risk management has risen sharply this year compared to the 2007 survey (it ranks no. 6 in the 2009 survey compared to no. 14 in 2007). The exposure to complex risk instruments such as credit default swaps (globally ranking no. 8 compared to no. 19 in 2007) have also increased. There is a strong feeling among respondents, particularly from Europe, that the industry is not naturally equipped to enter these markets and will have to “go back to basics”.
The general perception from respondents is that the industry is considerably less wellprepared to handle risk than it was in 2007. Globally, only four per cent of respondents thought that insurance companies were well prepared compared with 21 per cent from two years ago, and in Asia, the majority of the respondents at 92 per cent, has indicated “mixed feelings” about the industry’s preparedness to handle these risks.
The view that there is “too much regulation” has slipped down the rankings from a worldwide perspective. Although still within the top five rank (globally) and top four (in Asia), regulation remains a big issue in all the major markets mainly because of concern about a regulatory crackdown in the wake of the credit crunch. Insurance executives are worried that the industry will be made to share the cost for what is primarily (but not exclusively) a banking crisis. This concern is fairly pronounced in Asia in light of the relatively high position accorded to the perception of risk arising from political interference (ranking no. 10 in Asia compared to no. 18 at the world level).
The quality of management in the insurance industry, which had featured strongly in 2007, has also slipped down the list, from no. 3 to no. 13. But, again, this is more a result of being overtaken by the more urgent risks, and has not disappeared.
David Lascelles, the survey’s editor from CSFI, says: “The underlying message of this survey is all about crisis management. Can the industry sustain its profitability and capital to get through the crisis? The challenges are unprecedented.”
The current market is already affecting the outlook for premiums in both life and non life insurance businesses. In the life industry for instance, the worry is a dwindling job market that has yet to see bottom, further impacting sales and policy-holders’ the ability to service premium payments, and an increase in the likelihood of cashing-in. For non-life, the main concern, apart from the negative outlook for premiums as economic activity decreases, is the possible surge in claims, including those motivated by fraud. Concerns in the reinsurance industry are mainly with the security of capacity in a difficult market.
“The list of top risks identified by the insurance industry while not initially surprising given the current financial crisis and economic downturn, is notably consistent in Asia and around the world. Operating in this difficult environment implies not only a need for a major re-appraisal of key risks but also a need to critically evaluate how well-placed insurers are in dealing with these new and emerging risks,” observes Alywin Teh, Partner, Financial Services Industry Practice, PwC LLP (Singapore).
“Ultimately, the extent to which insurers have the ability to re-calibrate their risk appetites in response to a dynamic business environment and how well insurers respond to these challenges through strong enterprise risk management practices will determine how much more resilient they would emerge from the current down cycle” Alywin concludes.
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Click here to get a soft copy of the survey report.
1. The Insurance Banana Skins survey is the latest in the CSFI’s long-running Banana Skins series on financial risk, initiated in 1994. The series includes banking, insurance and microfinance.
2. The survey poll was conducted between November and December 2008 and is based on 403 responses from 39 countries. Eleven per cent of the respondents are from Asia, namely: China, Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and Thailand. Three quarters of the respondents this year were insurance executives, many in senior positions or at board level.
About the Centre for the Study of Financial Innovation
The CSFI (Centre for the Study of Financial Innovation) is a non-profit think-tank, founded in 1993, which looks at challenges to and opportunities for the financial sector. It has an affiliate organisation in New York, the New York CSFI.
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