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10 Sep The risks facing the global insurance industry in the mid-2015
This survey identifies the risks, or “Banana Skins”, facing the global insurance industry in the first half of 2015, as seen by a sample of 806 practitioners and close observers from 54 countries. It comes at a time when the world economy is showing moderate, if uneven, signs of growth, but the industry itself faces a difficult investment climate, a heavy regulatory agenda, and the pressures of deep structural and technological change.
Significantly, the overall tone of the responses this year is more negative than the previous survey in 2013, as measured by our Insurance Banana Skins Index (the “anxiety index”), despite the resumption of global growth. The average score given by respondents to our list of 25 risks rose to its highest level since we began the series in 2007, reversing the downward trend we saw in 2013 in the aftermath of the global financial crisis.
This pessimism is due primarily to pressures from the economic and public environments (i.e. macro-economy, regulation, political), signalling that the sector considers its greatest risks to lie outside its direct control.
Chief among the external risks is regulation, which tops the survey for the third year running. Concern is driven by the quantity of regulatory reform at all levels, in particular the EU’s Solvency 2 Directive. The fear is that these initiatives are loading the industry with costs, and distracting management from the task of running profitable businesses, as well as heightening compliance risk.
Worries about regulatory pressure are sharpened by the difficult economic environment in which the industry currently finds itself, in particular the persistence of low interest rates (No. 3) which is depressing investment performance (No. 5) and affecting bottom line results. Savings products with guaranteed returns (No. 7) remain a concern for the life side of the business. Respondents generally also see low yields driving a strong increase in competition as insurers seek to boost their “top line” revenues, and outsiders such as hedge funds chase business with new capital. The availability of capital at No. 22 is clearly not seen to be a problem: rather the opposite, it is in surplus.
Respondents were gloomy about the outlook for the macro-economy (No. 2), largely because of uncertainty about the future of quantitative easing, as well as the cooling of emerging market growth and the continuing crisis in the eurozone. Market conditions (No.13) in the non-life insurance market have a cycle of their own, and are currently depressed because of surplus capacity. Respondents gave a mixed view of the outlook, some seeing rates hardening, others commenting that the low level of major claims and plentiful capital would keep conditions soft.
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