‘Banana Skins’ poll pinpoints key concerns for insurers
SINGAPORE, 31 May 2011 - The greatest risk facing the insurance industry is the raft of new regulations being introduced simultaneously at international and local levels, according to a new survey which ranks insurance sector risk.
The CSFI’s latest Insurance Banana Skins survey, conducted in association with PwC, says that new rules governing issues such as solvency and market conduct could swamp the industry with costs and compliance problems. It could also distract management from the more urgent task of running profitable businesses at a time when the industry is already under stress.
The survey polled nearly 500 insurance practitioners and industry observers in 40 countries to find out where they saw the greatest risks over the next 2-3 years. Regulatory risk emerged a clear leader in all major markets, including Singapore.
The wave of regulatory changes expected also tops insurer’s list of top concerns in Singapore.
“Governments globally are shifting their regulatory emphasis to address the fundamentals of solvency, governance and enterprise risk management, and focusing on the issues that could be brought on by systemic risks,” says Dominic Nixon, Asia Pacific Financial Services Leader, PwC LLP.
He notes: “Insurers in Singapore are beginning to feel the impact of the EU’s Solvency II Directive, which is due for implementation in Europe by the end of this year. Insurers based in Singapore and in fact in Asia, are stepping up on awareness and developing skill sets that will help them address the changes required under the Solvency II framework.”
But Solvency II is just one of the regulatory concerns impacting Asia. Insurers are also concerned about the fast track changes expected in international reporting standards that could be adopted locally.
“A number of changes in international reporting standards are expected and they will be released in stages and adopted locally by the different markets at different times within these two years. The uncertainty on scale, expectations and timeline is a challenge, especially since core systems within most of these financial institutions could be affected to meet the requirements,” adds Dominic Nixon.
Tax is impacted too. Dominic Nixon, says, “As corporate tax filing in Singapore is currently based on both audited accounts and regulatory returns, both regulatory changes and accounting changes will have an impact on the taxation of insurers. Tax laws and tax practices must be able to evolve and keep pace with regulatory and accounting changes.”
Other high-ranking concerns revealed by the survey include the availability of capital to meet tougher regulatory requirements, and the uncertain state of the world economy and financial markets. These are adding to the pressures on an industry which is being squeezed by low interest rates and intense competition.
Globally, a strong riser in this year’s ranking of 26 risks was the incidence of natural catastrophes, a reaction to recent disasters in New Zealand and Japan. Also rising strongly is political risk, a consequence of events in the Arab world, plus growing concerns about the solvency of eurozone countries. A new entrant is the shortage of talent which emerged as a major issue in all regions.
Despite a high incidence of floods, bombings and oil spills over the last couple of years, concern about climate change, terrorism and pollution risks remains low. These are seen to be manageable underwriting risks, and less threatening to the insurance business than regulatory change.
In Singapore, leading the biggest riser in the top ten, and having the most marked divergence from the rest of the world, are talent shortage (#4 – Singapore) facing the insurance industry, followed by the post financial crisis challenge around complex instruments (#5), interest rates (#6) and retail sales practices (#10).
David Lascelles, survey editor, said:
“These results show an industry which is being pressed on many side sat once, and will need skilled management to get through. It is not clear whether new regulation is helping or hindering it.”
David Law, global insurance leader at PwC, said:
“Insurers’ attention has clearly changed with much more focus on how to deal with the increasing regulation they face. This is potentially distracting key resources and talent away from opportunities to grow their business. To gain a competitive advantage, insurers need to move the regulatory burden away from a box-ticking exercise to something that is embedded in the business and used to manage the changing risk profile. All this is set against a challenging backdrop of increased natural catastrophes, low interest rates and uncertain world economy.”
“To seize the market opportunities which has become much more positive then it was two year ago, insurers, particularly life insurers, are aggressively recruiting insurance advisers from competitors,” says Dominic Nixon.
He continues: “Some are doing this with lucrative buyouts and generous retention packages. This could drive up the cost of insurance and affect the quality of service. To top it all, the new capital requirements for solvency, dealing with regulatory and catastrophes, as well as interest rate challenges are not helping at a time when margins are already being squeezed.”
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1. The Insurance Banana Skins survey was conducted in March and April 2011 and is based on 490 responses from 40 countries. The breakdown by type of respondent was:
2. The survey is the latest in the CSFI’s long-running Banana Skins series on financial risk. Previous Insurance banana Skins surveys were in 2008 and 2009.
3. 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.