Technological Change and Cyber Risk Are Top Insurer Risks, According to CSFI Survey

The top risk now faced by the global insurance industry is its ability to confront structural and technological changes, according to a new survey of insurers and close observers of the sector.

The Centre for the Study of Financial Innovation (CSFI)  Insurance Banana Skins 2017 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.

Change management is at the head of a cluster of  operating risks that have jumped to the top of the rankings. The report raises concerns about the industry’s ability to address the formidable agenda of digitization, new competition, consolidation, and cost reduction it faces, especially because of rapidly emerging technologies that 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 insurers' internal technology systems and new competition, particularly from the "InsurTech" sector.

The next cluster of high-ranking risks, interest rates, investment performance, and macroeconomic 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 European Union was seen to be a minimal source of risk for insurers, particularly those without operations in the United Kingdom.

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 II), 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. 

David Lascelles, survey editor, said, "For the first time in six editions of this survey, operating risks pose the greatest threat to insurers. Structural and technological changes to the industry could upend traditional business models. At the same time, insurers are grappling with a very difficult economic climate, which helps explain why anxiety is at an all-time high."

Mark Train, PwC global insurance risk leader, commented as follows.

Both the challenges and opportunities presented by change underline the vital importance of being clear about where you're best able to add value, and then being ruthless in targeting investment and management time at these priorities. A key part of this "fit for growth" strategy is differentiating the capabilities needed to fuel growth, "good costs" targeted for investment, from low-performing business and inefficient operations, "bad costs" targeted for overhaul or elimination.

The CSFI is a nonprofit think tank, established in 1993 to look at future developments in the international financial field—particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger, and provoking a debate about key financial issues.