Article Synopsis :
The Centre for the Study of Financial Innovation (CSFI) is a non-profit think-tank established in 1993 to look at future developments in the international financial field – particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues.
“Insurance Banana Skins – 2017” is CSFI’s unique survey, based on 836 responses from practitioners, regulators and observers in 52 countries, of top board-level risks, and how the perception of these risks change over time. Nearly three-quarters of survey respondents represent the primary insurance industry.
Clearly, the big story of this year’s survey is the significant rise in concerns about “operating risks” – a cluster of risks that includes, in particular, advances in technology that are challenging the industry’s traditional way of doing things. Management is being forced to adapt to more rapid change and to new threats – particularly cyber threats.
In comparison, risks clustered together as “economic environment” (including interest rates and the macro economy) appear less pressing, as do regulation and governance. Perhaps surprisingly (given almost 40% of respondents are from Europe), “Brexit” doesn’t loom large as a risk, though, more broadly, the risk of political interference has increased significantly.
Insurance Banana Skins 2017 (2015 rankings)
- Change management (6)
- Cyber risk (4)
- Technology (-)
- Interest rates (3)
- Investment performance (5)
- Regulation (1)
- Macro-economy (2)
- Competition (-)
- Human talent (15)
- Guaranteed products (7)
- Political interference (16)
- Business practices (11)
- Cost reduction (-)
- Quality of management (12)
- Quality of risk management (10)
- Social change (20)
- Reputation (18)
- Product development (17)
- Corporate governance (21)
- Capital availability (22)
- Complex instruments (25)
- Brexit (-)
The marketplace is being transformed by a combination of new technology, shifting customer expectations and associated pressure on costs. Many insurers are hampered in their response by slow, rigid and unwieldy legacy systems. New entrants have free rein to probe for openings and disrupt the most attractive and valuable links in the value chain. Hence, change management moves from sixth to the top of this year’s list.
Disruption also brings huge opportunities to boost innovation and differentiation. Dealing with challenges and opportunities head-on is required, a ruthlessness in targeting investment priorities. Low-performing, inefficient operations not making the grade should be quickly eliminated or overhauled. And while technology is likely to be the main focus of investment, the right talent is just as important in fostering the agility, innovation and customer insight needed to compete.
Interest rates continue to be the biggest concern for life insurers. This underlines the importance of bolstering margins through sharper efficiency and innovation. A better understanding of the interdependencies between regulatory capital and asset yields can also help businesses capitalise on market opportunities, while curbing capital demands.
Cyber risk is the number one banana skin for reinsurers and high up the list within other segments. The threat from both direct cyberattacks and major cyber insurance losses is escalating. Even insurers that don’t underwrite cyber cover are likely to have considerable exposures within other business lines. Protecting against attack and managing the underwriting risks demand more timely and effective risk intelligence. This includes a better understanding of the ‘crown jewels’ most at risk and the constantly morphing nature of cyber threats.
On the way down
A notable faller is regulation, which drops from first to sixth. While mastering regulation is still a tough task, there’s a growing recognition that it’s now only table stakes – the price of entry to the game. Survival and success require a fundamental overhaul of costs, technological capabilities and innovation capacity – in short, effective change management.
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Digital Insurer's CommentsWe wholeheartedly agree with the key finding of this survey, that the pace and scale of structural and technological change confronting the global insurance industry is the biggest risk it faces over the next 2-3 years.
Rapidly evolving markets, rising customer expectations, and new distribution channels threaten traditional insurance business models, while incumbents held back by legacy systems and traditional modes of thinking struggle to innovate in an unfamiliar environment. Survey respondents variously describe the industry as “glacially slow in its response to change”, “too comfortable”, “inward looking, bureaucratic and complacent” and “reactive.” Ultimately, in the words of one widely echoed respondent: “The principal risk the industry faces is irrelevance.”
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