OREANDA-NEWS  On 02 March was announced, that the new Insurance Banana Skins survey, conducted by the CSFI in association with PricewaterhouseCoopers, shows how respondents rank the risks facing the industry. High on the list is the macro-economic outlook and its impact on the insurance industry. Lower business volumes and falling investment returns are expected to put strains on profitability and capital in many parts of the world.

Global survey results show that the ability to turn in a strong investment performance is seen as the key challenge facing the insurance industry as it manages its way through the financial downturn.

The latest Insurance Banana Skins survey shows that without the stable investment returns they have depended upon, insurance companies are facing an uncertain future in what is proving to be the worst business crisis in decades. This is in sharp contrast to the previous survey in 2007 when the top focus was on operational risks such as too much regulation. That year, market risks barely featured in the top ten – signifying a major shift in risk perceptions due to the crisis.

Russian respondents specially pessimistic about the macro-economic outlook, fearing that the stresses of recession would severely damage the insurance industry.

Chris Barrett, partner, insurance leader, PricewaterhouseCoopers, said:

“The top Russian results were broadly in line with the world total, showing a strong focus on the risks arising from the financial crisis. However there were also marked differences, notably greater emphasis on operational risks such as fraud and a recognition that many insurers are not prepared for today’s risks.”

Financial crisis:

Russian respondents shared the world’s concerns about the fall-out from the crisis in the financial markets, particularly the impact on investment (No 3 in Russian rating and No 1 in Global). But they were more pessimistic about the macro-economic outlook (No 1), fearing that the stresses of recession would severely damage the insurance industry. Some respondents predicted company failures. However the Russians were less concerned with the risks associated with complex financial instruments (No 8) such as credit derivatives which are not widely used.

Operational risks:

On the other hand, Russian respondents showed a much stronger concern with some of the operational aspects of the crisis. A rise in fraud (No 5) is the first in rating among the operational risks defined by the Russian respondents, it is followed by need to manage costs (No 6) and the pressure to keep the business going in the face of intensifying competition, particularly from foreign entrants. The global insurance community is more worried about too much regulation (No 5) and risk management techniques (No 6). The security of the reinsurance (No 7) sector was a concern because of the importance of the capital to the primary market.

Russia was one of the few countries where too much regulation did not rank among the top ten risks. This was because the risk is seen as the opposite: too little regulation, which came 24th on the Russian scale versus 5th on the world scale.

The survey also shows that global industry is seen to be less well prepared to handle risk than it was in 2007. Only four per cent of respondents thought that insurance companies were well prepared compared with 21 per cent last time. Russia was more negative with the majority of respondents replying poorly prepared (3%) or mixed (97%). None thought that Russian insurers were well prepared.

Chris Barrett concludes:

“Whilst the top risks identified in the survey are not initially surprising it is salutary to see how markedly the perception of key risks have changed since 2007 and how consistent the views of key risks are around the world.

“The industry is now operating in the worst economic downturn seen in decades which has led not only to a major reappraisal of key risks but also a concern that the industry is not as well placed to deal with them as it once thought. Responding to these challenges and embedding good risk management practice across organisations is critical if the industry is to emerge from this cycle in a better position.”