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Technological change and cyber risk overtake regulation as top insurance industry ‘Banana Skins’

The global insurance industry's ability to confront structural and technological changes is now the greatest risk it faces, according to a new survey of insurers and close observers of the sector.

The Centre for the Study of Financial Innovation’s (CSFI) latest Insurance Banana Skins survey, conducted with support from PwC, surveyed 836 insurance practitioners and industry observers in 52 countries, to find out where they saw the greatest risks over the next 2-3 years.

The top Banana Skins’ were seen to be as follows:

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

Macro-economy (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 (-)

Change management is at the head of a cluster of operating risks which have jumped to the top of the rankings. The report raises concerns about the industry's ability to address 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.

Cyber risk follows close behind, with anxiety rising about attacks on insurers themselves as well as the costs of underwriting cyber crime. Other major concerns include the adequacy of insurer's internal technology systems and new competition, particularly from the 'InsurTech' sector.

The next cluster of high-ranking risks, interest rates, investment performance and macro-economic risk, shows that concern about economic instability remains high. 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.

Regulatory risk, which has topped the last three editions of this survey, has fallen out of the top five this year. This is largely because recent regulatory changes are settling in to business as usual (e.g. Solvency 2), though the cost and complication of regulation continue to be a concern.

The report shows that the industry's ability to attract and retain human talent is a fast-rising concern, particularly to handle the digital challenge.  Conversely, an area of declining risk is the governance and management of insurance companies. 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. 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.   

Previous Insurance Banana Skins surveys were in 2007, 2009 2011, 2013 and 2015. The report is prepared by the CSFI, which is solely responsible for the editorial content, with support from PwC.

Read the survey report (PDF).



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