Of Special Interest


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13th February 2013

EIU/BNY Mellon report highlights global issues for insurers

Ongoing macroeconomic uncertainty, proposed tough new regulatory regimes and risk of contagion are the biggest long-term challenges facing insurers around the world, according to a new report written by the Economist Intelligence Unit(EIU) and sponsored by BNY Mellon, a global leader in investment management and investment services.
As a result, insurers are rethinking business processes and product ranges in order to remain competitive under new risk-based capital regimes, to meet the evolving needs of their customer base and to continue to play a beneficial role in the economy and broader society over the next two decades.
The key findings of the study–"Insurers & society: Challenges and opportunities in the period to 2030"–include:
-Macroeconomic uncertainty, regulation and risk of contagion– Macroeconomic uncertainty is seen by survey respondents as the main challenge facing both life and non-life insurers(36% and 39% respectively) in the period to 2030. Regulation is the second-biggest challenge facing life insurers (34%), while risk of contagion from other parts of the financial system is a major concern for non-life insurers and reinsurers(33%).
-Regulators and policymakers should consider socioeconomic goals–Almost fourth-fifths (79%) of respondents agree that regulators should balance concerns for policyholder protection with other socioeconomic objectives, such as promoting savings; while almost half(48%) believe that policymakers should incorporate socioeconomic goals into regulators' remits. Over half(54%) believe that regulators and legislators are focusing on near-term stability at the expense of longer-term economic growth.
-Insurers are not doing enough to meet societal responsibilities–A strong majority (80%) of respondents agree that insurers have a duty to contribute positively to society, with all regions in equal agreement, yet only 55% agree that insurers are fulfilling that role. Overall, intermediaries are slightly less convinced that insurers are contributing (53%, compared with 56% of insurers, with the biggest discrepancy between the two groups seen in North America, where those figures are 64% of insurers but just 36% of intermediaries.
-Regulation is hampering insurers’ ability to meet consumers’ needs–70% of respondents agree that individuals will have inadequate private savings and pensions as a long-term consequence of new regulation, while just over a half (51%) believe that current regulatory and accounting rules encourage insurers to move away from guaranteed products, leaving individuals with the burden of investment risk. In response to changes affecting the industry, life insurers are offering fewer products(49%), limiting guarantees(40%) and raising prices(35%).
-Insurers are needed more than ever but are at risk of irrelevance–Over a half of respondents(54%) believe that regulation reduces insurers’ ability to shift risk away from households and transform financial market risk into reliable streams of retirement income and other benefits—one of the industry’s core functions. The same proportion believe that the burden will fall on governments to make up for individuals' private pension shortfalls, but almost half(45%) worry that they will not be able to afford to do so.
-Insurers need help to support developing countries and emerging economies– Nearly a half(45%) of respondents said that supranational organisations should prioritise working with developing countries to better inform policymakers of the value of catastrophe and other forms of insurance. Over half worry that, without adequate data, reinsurers may withdraw from providing catastrophe reinsurance in emerging markets(55%); and that if reinsurers pull back from these markets, individuals and corporates will be forced to go underinsured (52%). Respondents(57%) also fear that the absence of reinsurance will slow investment into emerging economies, which in turn will slow these countries' economic growth—a major concern, given the importance of emerging economies to pulling the global economy out of stagnation.
Paul Traynor, head of Insurance for Europe, Middle East & Africa at BNY Mellon, said “If, as the study suggests, insurers believe their core competence of turning financial risk into reliable income streams is being undermined by regulation-in that proposed rules will hinder their ability to take on that role-then we are at risk of a vicious circle developing, in which individuals under invest for their future and are forced to rely on the government. In turn, governments who cannot afford to bear the burden, attempt to meet the shortfall, pushing up their sovereign debt to unsustainable levels. Undermining solvency regulation, which encourages insurers to hold government bonds as these are considered ‘risk free’."
Monica Woodley, Managing Editor at the Economist Intelligence Unit, said “While market stability and consumer protection are important goals, regulators and policymakers should not lose sight of the vital role the insurance industry plays in helping households and companies to reduce risk and save for the future. Limiting the insurance industry’s ability to transform risk will have serious ramifications for future generations, leaving consumers under-insured and without inadequate private savings and pensions.”
The Economist Intelligence Unit surveyed 332 companies around the world including insurers, reinsurers, wealth managers and independent financial advisers to find out what immediate and long-term challenges the insurance industry faces and how insurers are responding, as well as to explore ways in which the industry will develop in the future.
The report was published in conjunction with the Insurance Summit run by Economist Events yesterday in London attended by 120 delegates-many of them senior market figures. The theme was "Insurance and Government-Today, Tomorrow, and Beyond."