A new survey charting the top risks in the global insurance sector shows that cyber risk and new technologies are now among the top risks for insurers. Their entry, new into the rankings of this fifth successive survey, are indicative of how high a concern they have become for the industry when looked at in conjunction with regulatory developments and the broader macro-economy.
Cyber risk was ranked as the number 1 concern by insurers in South Africa, the UK, and North America. Cyber risk ranked 4th on the combined global survey.
The Centre for the Study of Financial Innovation’s (CSFI) latest 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 two to three years. There were 35 responses from South Africa, and 42 in total from Africa as a continent.
Regulatory risk emerged as the overall global top risk for participants in the survey for the third successive time, underlining the deep impact regulatory change is having. It has been the top risk in four of the five surveys since 2007.
The main concerns are that new rules governing solvency and market conduct could swamp the industry with costs and compliance problems. They could also distract management from the task of running healthy businesses at a time when the industry also faces radical structural change.
The EU’s Solvency II Directive, to be introduced next year, was the focus of strongest concern. Other countries around the globe, including South Africa, are also introducing similar measures modelled on Solvency 2. South Africa has adopted a ‘Twin Peaks’ model to regulate the solvency and market conduct requirements of insurers, which will also be implemented from 2016. Its Solvency and Assessment Management (SAM) rules, modelled on the Solvency II directive, will regulate the solvency requirements of insurers on a risk based approach. At the same time, it has adopted the Treating Customers Fairly rules to regulate the market conduct of all financial institutions, including insurers.
While the beneficial impact of tighter regulation was acknowledged, the survey responses showed that regulation was also widely seen as excessive and overbearing.
This view was held both by practitioners and outside observers of the industry which included academics, consultants and analysts, etc.
The long-term growth prospects for insurers on the continent are very positive, as more African economies in general are growing, and more people start to accumulate more wealth to protect. Rapid migration into cities and increasing infrastructure spending by African governments are also contributing to the growth in insurable assets and lives. Given that insurance penetration rates are also relatively low compared to the rest of the world, the prospects are encouraging. And yet African insurers also face the disruptive impacts of rapidly changing technologies, evolving customer behaviours and expectations and volatile markets added to the increasing regulatory burden. Those insurers who are able to identify and manage these emerging as well as other familiar risks while keeping up with the changing regulatory landscape will differentiate themselves from their competitors.
The second cluster of emerging concerns was around macro-economic risks. Respondents were cautious about the outlook for growth, as well as for interest rates, whose persistent low levels since the financial crisis have depressed investment yields and made savings products more difficult to manage and sell. It was surprising to note that interest rates were seen as less of a concern in South Africa and only ranked 23 compared to 3 on the global rankings.
The third cluster of emerging risks was in the area of industry change, particularly the impact of new technology on security, product delivery and data management. Cyber risk emerged on top of the list for the first time since the survey was initiated in 2007, and was ranked high at number 4 globally, and number 1 for non-life insurance, reflecting rapidly growing concerns about cybercrime and data security.
The digitisation of the industry also threatens traditional business models in the areas of distribution, new entrants and client interface. Many respondents expect to see major structural changes in the industry in the coming years.
Concerns were also high among South African respondents that insurers were not making the best use of technology to develop new distribution channels. In general there were widespread views that the industry has been slow to keep pace with new technology and was getting left behind by the banking industry.
As more and more businesses move to online and mobile channels, insurers’ vulnerabilities to fraud and data compromise will continue to increase. It is vital that boards take the lead in evaluating and tackling the issue of cyber risk within their data, processes and systems infrastructure, rather than leaving this to be dealt with by information technology managers alone.
In addition, regulation, digital technology, changing customer expectations and competition from new entrants are just some of the disruptive shifts facing insurers. Many of these disruptive shifts echo the social, technological, environmental, economic and political global mega-trends which PwC has identified in its Insurance 2020 reports. Insurers are using Insurance 2020 to assist them to assess the implications of these trends for their businesses and to determine the strategies needed to respond appropriately.
Victor Muguto, Head of Long-term Insurance, PwC Africa