PwC: Regulatory pressure top concern of Bermuda insurers
The greatest risk currently facing the Bermuda and global insurance industries comes from the wave of new regulations which are being introduced at international and local levels, according to a new survey which ranks insurance sector risk.
Regulation and investment performance were the top concerns for the Bermuda respondents.
The Centre for the Study of Financial Innovation’s (CSFI) latest Banana Skin Survey, conducted in association with PwC, indicates that new rules governing issues such as solvency and market conduct could swamp the industry with cost and compliance concerns, a statement from PwC Bermuda said.
“This could force executives to shift attention away from the urgent matter of running profitable businesses.”
This is the second successive Banana Skins survey which has identified regulation as the top risk as it emerged a clear leader in many major markets, including Bermuda, North America, Europe, and the Far East/Pacific. The 2013 findings underline the continuing uncertainty surrounding major regulatory initiatives.
The EU’s Solvency II Directive was the strongest focus, particularly since many non-EU countries are awaiting the outcome before they finalise plans of their own.
Arthur Wightman, PwC Bermuda’s Insurance Leader commented on the survey results: “Globally, insurers view regulatory risk as unsurpassed by any other which is ironic given the objective of regulation in the first place. It is the unintended consequence of compliance that is stressing infrastructures in a period where underwriting and investment conditions are fragile.”
Mr Wightman added: “In Bermuda, a competitive advantage for the jurisdiction does appear to be emerging based on the BMA's approach to Solvency II equivalence, whether that be for reinsurance groups, life companies or captives.”
The Bermuda results of the survey were distinctive, PwC said: “The Islands’ respondents shared the global top concern about the damaging impact of regulation and the difficulty of obtaining satisfactory investment returns. However, some rankings varied from the global results. Concern with underwriting risk was high: natural catastrophes, climate change, terrorism and pollution all came in higher than the global results.”
The dominant concern in most of the responses was the excess of capital in the business.
“Poignant to the local market is the flood of capital into the reinsurance sector, much of it with lower rate-on-line parameters,” PwC said.
“As the property cat market evolves, certain structural changes will need to take place to ensure long-term success overall. Participants don't have the latitude to hunker down and hope the status quo of five years ago will return. The market needs innovators to step forward and capitalise on a world where increasing trade flows, urbanisation and natural catastrophes create an opportunity to grow reinsurance capacity in the aggregate. Without this, existing and new participants will simply scrap over finite share, says Mr Wightman.”
Insurance Banana Skins is a biennial with over 660 insurers, observers and regulators of the industry across 54 countries participating.
2013 Key Concerns for Insurers — Bermuda results1. Regulation
2. Investment performance
3. Natural catastrophes
4. Actuarial assumptions
5. Long tail liabilities
6. Climate change
7. Guaranteed products
8. Political interference
9. Macro-economic environment
10. Quality of management
11. Complex instruments
12. Social media
13. Change management