Financial crisis tops risk list

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29 June 2009

The financial market crisis tops the list of the 10 biggest risks for the insurance industry in a new report by Ernst & Young.

The international consultants’ annual business risk report identifies risks ranked by more than 100 analysts.

The top 10 risks are:

1. the financial market crisis (likely to shape the industry for the next decade);
2. model risk (failure to recognise risk model shortcomings);
3. regulatory intervention (an evolving global landscape including changes around Solvency II);
4. managing the non-life underwriting cycle;
5. geopolitical shocks;
6. demographic shifts in core markets;
7. emerging markets;
8. channel management;
9. legal risk;
10. climate change and catastrophic events.

The report says risks in managing the underwriting cycle are recognised because they are arguably the leading cause of insolvency for general insurers.

While profitable hard markets tend to last three to four years, soft markets generally last eight to 10 years, placing insurers under severe pressure.

The risk of geopolitical shock is heightened by the economic slowdown, as falling incomes generate political pressures and collapsing tax revenues threaten governments’ capacity to respond.

Emerging markets are seen as an area for expansion but can be complicated by cultural issues in joint venture with local partners. They are also susceptible to rapid and sudden downturn.
At number eight, multi-distribution channels are acknowledged due to the significant opportunities they offer for future growth. However, mismanaged strategies in this complex area can lead to disappointing sales, persistency, profitability and growth.

Legal risk and unexpected changes in both the forms and sources of liability driven by the economic downturn is creating challenges for general insurers in how they price and underwrite new business and how they reserve for claims from asbestos, environmental and other related exposures already on the books.