Structural and technological changes head list of insurance sector ‘banana skins’

Change management is the greatest risk faced by the global insurance industry, according to a survey by the Centre for the Study of Financial Innovation (CSFI) and PwC. The latest Insurance Banana Skins 2017 survey finds that the industry’s ability to confront structural and technological changes heads the list of ‘banana skins’, followed by cyber risk and technology. This year’s survey ranking has seen a number of changes from previous years. Regulatory risk, which has topped the last three editions of this survey, has fallen out of the top five this year. PwC says this is largely because recent regulatory changes are settling in to business as usual, though the cost and complication of regulation continue to be a concern. Change management was only ranked sixth last year. The report raises concerns about the industry’s ability to address what it calls “the formidable agenda of digitisation, new competition, consolidation and cost reduction it faces, especially because of rapidly emerging technologies which could transform insurance markets, such as driverless cars, the ‘internet of things’ and artificial intelligence”. Mark Train, PwC global insurance risk leader, comments: “Both the challenges and opportunities presented by change underline the vital importance of being clear about where you’re best able to add value, and then being ruthless in targeting investment and management time at these priorities. A key part of this ‘fit for growth’ strategy is differentiating the capabilities needed to fuel growth, ‘good costs’ targeted for investment, from low-performing business and inefficient operations, ‘bad costs’ targeted for overhaul or elimination.” Cyber risk continues to be an issue, with anxiety rising about attacks on insurers themselves as well as the costs of underwriting cybercrime. This year’s top ten includes two new risks that have not appeared before: the adequacy of insurers’ internal technology systems and new competition, particularly from the insurtech sector. Concern about economic instability remains high, with interest rates, investment performance and macroeconomic risk all in the top ten. “Although respondents acknowledged signs of growth, confidence in the recovery is not strong for reasons as widely dispersed as the slowdown in China, the risk of Trump-era protectionism, and populism in Europe. The risk of political interference was seen to have risen sharply. However, Britain’s exit from the EU was seen to be a minimal source of risk for insurers, particularly those without operations in the UK,” the report notes. On the plus side, the governance and management of insurance companies have fallen in the ranking as major risks. The report notes that these were seen as high-level risks during the financial crisis but have fallen sharply since, because of both initiatives from the industry itself and regulatory pressure. Overall, the climate for insurers is becoming more challenging, according to respondents. According to CSFI, the 2017 Banana Skins Index, which measures the level of anxiety in the industry, is at a record high, while the industry’s preparedness to handle these risks has fallen from 2015. David Lascelles, survey editor, comments: “For the first time in six editions of this survey, operating risks pose the greatest threat to insurers. Structural and technological changes to the industry could upend traditional business models. At the same time, insurers are grappling with a very difficult economic climate, which helps explain why anxiety is at an all-time high.” The Insurance Banana Skins 2017 report surveyed 836 insurance practitioners and industry observers in 52 countries, to find out where they saw the greatest risks during the next two to three years. Insurance Banana Skins 2017 (2015 ranking in brackets) 1. Change management (6) 2. Cyber risk (4) 3. Technology (-) 4. Interest rates (3) 5. Investment performance (5) 6. Regulation (1) 7. Macroeconomy (2) 8. Competition (-) 9. Human talent (15) 10. Guaranteed products (7) 11. Political interference (16) 12. Business practices (11) 13. Cost reduction (-) 14. Quality of management (12) 15. Quality of risk management (10) 16. Social change (20) 17. Reputation (18) 18. Product development (17) 19. Corporate governance (21) 20. Capital availability (22) 21. Complex instruments (25) 22. Brexit (-)

Structural and technological changes head list of insurance sector ‘banana skins’

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