The survey, conducted by the Centre for the Study of Financial Innovation (CSFI) in association with PwC, is charting risks in the global insurance sector over the next two-three years.
Macro-economic risks have risen to the top of the list of business threats to insurers.
“The economic outlook continues to be uncertain as markets in Central and Eastern Europe are adversely affected by the Eurozone crisis in the west and geopolitical uncertainty in the east. The macro-economic environment has a major impact on the demand for insurance products and their profitability. Insurers are reacting by reducing operating costs and focusing on the profitability of business,” according to a PwC statement.
The persistently low interest rate environment was seen as a more severe threat in Europe than any other region. This risk was a new entrant in this year’s survey and debuted in the number 2 position in CEE and number 3 globally. As a result, insurance companies are struggling with lower investment performance, which in turn adversely affects overall financial results. Furthermore, insurers which offered savings products with guaranteed returns when interest rates were high back in the 1990’s are now facing losses because insurers cannot earn high enough returns to fund the liability.
“The adverse economic conditions and low interest rates have brewed a ‘perfect storm’ which threatens the investment income which is vital to all insurance businesses, while creating challenges with respect to guaranteed products in life businesses. In combination, these risks threaten to squeeze long-term profit margins,” stated Alexandra Smedoi, Director, Financial Sector Tax Consulting Team, PwC Romania.
“To ensure sustainable success in this environment, insurers need to review their products and investment strategies in terms of both ROI and matching maturities to insurance liabilities. Product innovation will be key to maintaining competitiveness and profitability,” Smedoi also said.
Regulation is seen as the top risk globally for the third time in a row, and the fifth biggest risk in CEE. Regulation – and in particular the 2016 deadline for Solvency II implementation – is creating additional uncertainty in an already difficult market. Companies are struggling with increased demands and costs of compliance with regulations.
The issue of business practices is very much on the mind of insurers, particularly in relation to unethical sales of life insurance products by intermediaries. In an attempt to address these risks, regulators are introducing consumer protection legislation to provide better oversight over intermediaries and distribution channels – adding yet another dimension to the regulatory compliance burden.
Cyber risk is a growing concern around the world, and has debuted in seventh place in Central and Eastern Europe and in fourth place worldwide. After several high-profile security breaches of health insurance companies in the US, both customers and insurers are worried about the security of sensitive personal data. National regulators have also taken notice and implementing new legislation to assist insurers in managing and mitigating IT risks.
Despite escalating economic, regulatory and industry pressures, insurers in Central and Eastern Europe feel more confident in their ability to respond to business risks than they did 2 years ago.
“In the 2013 Insurance Banana Skins survey, regulation was considered the highest risk in CEE, mainly due to uncertainty about Solvency II readiness and the related cost/benefit ratio. Since then, we have observed a greater emphasis on managing risk and compliance among insurance companies in CEE. Insurers are investing in good governance, tighter controls, and more secure IT systems,” Smedoiu added.
The CSFI’s ‘Insurance Banana Skins 2015’ survey, conducted in association with PwC, polled over 800 insurance practitioners and industry observers in 54 countries to find out where they saw the greatest risks over the next 2-3 years.