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Banana Skins: insurance
What insurers really worry about
Keyur Patel analyses the latest findings of the CSFI Insurance Banana Skins survey and finds that cyber crime and climate change are keeping the industry awake at night
The Covid pandemic has disappeared in the rearview mirror as global concerns about geopolitics, extreme weather and a cost-of-living crisis have grown.
When it comes to assessing these rising threats from a financial services perspective, insurance often receives second billing behind sectors such as banking and asset management. But given that insurers are the ones in the business of underwriting the risks society faces, what keeps them up at night is worth noting.
Their latest concerns are analysed in the 2023 edition of the Centre for the Study of Financial Innovation’s (CSFI) biannual Insurance Banana Skins Survey, in association with PwC, which has been taking the pulse of the industry since 2007. This year, we surveyed 589 respondents – spanning the life, property and casualty (P&C), composite, broking and reinsurance sectors – in 39 territories, on the most urgent risks facing the industry. Respondents were asked to score 24 risks on a scale from one to five, where five is the most severe, and the average scores were tabulated. (See chart)
Cyber criminals seem always to be one step ahead and the need to invest in cyber security continues to increase
Two findings stand out. First, cyber crime is seen as the greatest risk facing insurers for the second consecutive survey and, if anything, has become more threatening since 2021. Second, especially on the P&C and reinsurance sides of the industry, climate change poses an urgent, perhaps existential, risk to business models – not just over a horizon of decades, but in the near term.
Cyber crime was assigned the highest average score out of five (at 3.92) for any risk in this survey since 2011. We received comments about increasingly sophisticated hackers exploiting a variety of ‘attack vectors’ (methods to break into IT systems), while insurers desperately grapple to secure every potential point of entry.
Karina Robinson, chief executive of Redcliffe Advisory, was worried about “cyber security in a world of geopolitical upheaval – the professional hackers who move in the shadowy world of being supported by, but not acknowledged by, states like Russia and Iran… Assigning clear blame for such actions becomes ever more difficult”.
Let just one attack slip through and insurers face threats to business continuity and, if sensitive data is stolen, potentially calamitous reputational damage. Yet the costs of keeping up are swelling. “Cyber criminals seem always to be one step ahead – the need to invest in cyber security continues to increase,” said the chief risk officer at a Canadian life insurer.
The second-ranked Banana Skin this year is regulation. That may sound somewhat self-serving: which industry doesn’t complain about its rule makers? Even so, regulation irked most respondents with what are seen as disproportionate costs of compliance, and the perception that “excessive, overlapping and sometimes inappropriate or outdated regulation”, as one respondent put it, stifles innovation and the industry’s ability to attract talent.
Commenting on the growing body of rules, a risk officer at one reinsurer said: “In the capital space, we see the post-Brexit manifestations through the development of Solvency UK; the European Insurance and Occupational Pensions Authority (EIOPA) weighing up Solvency II reform, and the International Association of Insurance Supervisors (IAIS) launching Insurance Capital Standard. All of this while many firms are trying to understand the impact of the International Financial Reporting Standards 9/17.”
Perhaps the most striking result in this survey, at No. 3, is climate change. More respondents scored it at a severity of five than for any other Banana Skin. If responses from the life insurance industry (where the risk tends to be ranked lower), had been excluded, it would have topped the overall rankings.
The chief risk officer at an insurer in Hong Kong warned: “The long-term impacts of climate change [are] changing the frequency and severity of weather events, showing in the increase in wildfires, convective storms, droughts impacting on yields and flooding. The impact on claims is becoming more severe and apparent.”
Beyond these rising costs, there is a crucial wider question about which risks may no longer be insurable – and the resulting social implications. A respondent from the P&C industry in Canada said: “Insurers are struggling to price the risk appropriately. Moves to exit higher risk markets will reduce capacity and put more pressure on governments to insure losses in their geographies. This could give rise to regulatory and taxation regimes that aim to shift those losses to insurance industry participants.”
At No. 4 is technology risk, which topped these rankings four years ago. We received much comment about the double-edged sword of tech modernisation. That is, the opportunity costs of upgrading IT systems when faced with other priorities, versus the potential higher costs of doing business for insurers that fail to keep up. A respondent from the P&C industry in Denmark saw “the possibility for one or a few dominant players that will succeed with their transition, while the rest of the companies will fall behind in a way where they will not be able to catch up to the market again”.
Two other high-ranking Banana Skins were also linked to the industry’s perceived difficulties in adapting to new technologies. Its ability to attract and retain human talent came in at No. 5, a ranking largely driven by the paucity of talent in technology-related roles. Enrique Vives, head of corporate finance at Zurich Spain, bemoaned “low supply and high difficulty in recruiting highly qualified employees in the areas of pricing, advanced and flexible IT systems, advanced analytics and financial expertise”.
Higher inflation raises the risks of people underinsuring and adding costs to the sector as claims values rise
A shortage of people to fill these roles seems to be common to most industries, but respondents wondered whether the generally unsexy reputation of insurance as a career path has moved it even further back in the queue.
This year, for the first time, we also surveyed the risk to the insurance industry from artificial intelligence (AI) – specifically the new wave of generative AI enabled by tools such as ChatGPT. Coming in at No.7, it received a lot of attention, particularly about the difficulties in regulating AI, the opacity of ‘black box’ models, and the systemic risks that could arise from overreliance on interconnected data sources.
Respondents saw AI as both a risk and an opportunity. Michael Rolfe, head of L&H Solutions Sales APAC at Swiss Re in Hong Kong, said: “I see the risk versus reward of generative AI for the insurance industry as being much more skewed towards risk. The potential for profound and rapid social change, combined with a much less agile legal and regulatory environment, creates a big potential for risks pools to rapidly emerge or shift where the insurance industry is unknowingly exposed.”
The macro-economy is ranked at No. 6, four places higher than its 2021 ranking. Unsurprisingly, a specific concern was the impact of rampant inflation, which puts pressure on insurance pricing and affects the size of claims and the value of loss reserves. Tim Grafton, chief executive of the Insurance Council of New Zealand, said: “Current global economic conditions remain weak, with high inflation, potentially raising risks of people not insuring/underinsuring and adding costs to the sector as claims values rise.”
Perhaps more surprising is that interest rate risk has dropped three positions to No. 8, even as rising interest rates were seen to raise the risk of recession, reduce customer spending capacity and impair credit quality. But they do also ease pressure on insurers by helping to improve investment performance – a risk that fell from No. 9 in 2021 to No. 14 this year. Many respondents believed that interest rates were now almost at their peak.
What about the Banana Skins ranked towards the bottom of the table? Given the emphasis on technology elsewhere, it is puzzling that the biggest downgrade in this year’s survey was the risk from technology-enabled competition (No. 16, down from No. 8 in 2021). The general view in the comments was that insuretechs, which have been lauded for years as genuinely disruptive challengers to industry incumbents, have overpromised and underdelivered – incurring start-up losses that are too large and struggling with regulation and capital requirements.
Stringent regulation and supervision in Europe have led to higher standards of management
Three of the bottom four Banana Skins this year are governance risks – quality of management (No. 21), business conduct (No. 22) and corporate governance (No. 23). These are areas in which the rigorous regulation and oversight over the past decade have had a positive effect. For example, Emmanuel Michiels, chief risk officer at Belfius Insurance in Belgium, said: “Stringent regulation and supervision in Europe with fit and proper rules and good risk practices promote higher standards of quality in the management.”
But it is always worth wondering whether our lowest-scored risks may hint at a touch of complacency. On corporate governance, a broking respondent in the UK asked: “Measurement is high, but are the things being measured the most important items?”
One seemingly emphatic message we received was that the lingering impact of the Covid pandemic on the insurance industry has been manageable, even if some respondents worried, for example, about “the effects of long Covid-19 on life, critical illness and disability insurance”. Post-Covid effects ranked bottom of the table by some distance, with a broad view that the industry has adapted to ‘a new normal’.
But one lesson we have learned from conducting these surveys is that it tends to be the interplay between risks, rather than a single headline-dominating issue, that causes insurers the most worry. “Individual risks may not impact on any given company but the interconnectedness may drive impacts that would not otherwise be anticipated,” warned a chief risk officer in Canada. “Trying to monitor all of this is a significant challenge.”
Keyur Patel
Keyur Patel is an independent journalist and consultant with a background in economics, and co-author of Insurance Banana Skins 2023
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