Will 2015 Be the Year of Sleepless Nights for Global Insurers?

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A new survey suggests insurance execs have a number of concerns about how their industry will fare in 2015

According to a January report from research firm Towers Watson, titled ” Will 2015 Be the Year of Sleepless
Nights for Global Insurers?”
2,015 is likely to be a year of change for the insurance industry, and that’s led insurance industry executives to have concerns about several issues.

Of note, Towers Watson’s 2015 Insurance Industry Outlook survey included 365 respondents from both life and non-life insurance companies worldwide. The survey was undertaken from October 27 through November 14 of 2014.

The discussion below is excerpted a panel discussion of Towers Watson insurance industry experts.

Insurers concerned about new regulations

Graham Fulcher, Towers Watson, Reigate, P&C risk consulting and software, expresses the concern that “In the Lloyd’s market, we’ve seen situations over the last 24 months where actuaries have been taken off pricing jobs to deal on an emergency basis with Solvency II deadlines. I worry that this excessive diversion of resources and executive time to regulation will come at the cost of other activities that are equally fundamental to the industry’s long-term health.”

Wolfgang Hoffmann, Towers Watson, Cologne, risk and capital management and M&A for insurers, comments on market conduct as well as upcoming regulatory concerns. “It’s important to note that Solvency II is not the only regulatory challenge. For a number of years, market conduct has been a growing concern for regulators, as evidenced by the establishment of a Financial Conduct Authority in the U.K. The question on how insurers are treating their customers, particularly in countries where it hasn’t been high on the agenda, could become quite relevant going forward.”

Michael Freeman, Towers Watson, Tokyo, life insurance risk consulting and software, notes: “In the Asia Pacific region, attention is being paid by both regulators and insurers to the developments of Solvency II in Europe. While different countries in the region are moving at different paces in the evolution of their solvency standards for the insurance sector, leading insurers are developing their own internal systems for measuring and managing capital, regardless of regulatory requirements.”

Low interest rates

Steve Kean, Towers Watson, Hong Kong, market analysis, strategy development and distribution optimization, highlights the impact of low interest rates on the insurance industry. “For a while now, some CEOs have been asking themselves about the low interest rate environment. More recently, the view appears to be that we are in a new reality of sustained low interest rates. The exception, of course, may be Japan, where interest rates have been low for many years and where quantitative easing has also been around a long time, yet it shows no significant signs of coming out of that low-rate environment. There are still companies with investment strategies that assume rates will rise over the next couple of years, so perhaps we should suggest it would be more prudent for insurers to assume the worst, and find other ways to concentrate on profitability and the robustness of their products.”

Hoffmann also notes that based on his life insurance experience, the “concern about interest rates is not at all surprising. If anything, concern has intensified because many insurers were late to protect themselves from low interest rates. In the future, companies need to look at whether their products are viable in extreme cases and take precautionary measures.”

He does allow that companies are beginning to change their product mix and create more flexible products that have lower guarantees or less onerous guarantees. Hoffman points out that “Some new product designs also take into account potential adverse capital market developments using market value adjustments for surrender values. Reducing the level of guarantees or providing guarantees in a smarter way is a big theme right now in many countries, increasing flexibility for the customer.”

Evolving business model

Ellnor Friedman, Towers Watson, St. Louis, life insurance risk consulting and software, highlights insurance execs concerns about rapidly changing business models in the industry. “Something else strikes me about our survey findings that might be contributing to a fairly pessimistic industry outlook. When we asked respondents what keeps them up at night, many expressed concern about their business model and its ability to deal effectively with the range of business issues. This is a whole different matter that lifts the discussion from mundane regulatory issues to the very question of running a successful business. Several American respondents are clearly worried about their company’s ability to move quickly and creatively to meet business challenges.”

Fulcher chimed in to say ditto in Europe: “We see the same concerns expressed in Europe. Several respondents wrote of their concerns about the pace of innovation or, conversely, the question of whether their particular company is moving fast enough to innovate. Fear of new competition also seems to be most acute in Europe, which has fewer regulatory barriers to change when compared to the U.S., for example.”

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