Technological change and cyber risk have overtaken regulation as the top risks facing insurance companies worldwide, according to a new survey by PwC and the Centre for the Study of Financial Innovation (CSFI).
CSFI and PwC’s Insurance Banana Skins 2017 study surveyed 836 insurance practitioners and industry observers in 52 countries to find out where they saw the greatest risks over the next two to three years.
Overall, survey respondents said the climate for insurers is becoming more challenging. The 2017 Banana Skins Index shows that 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.
“For the first time in six editions of this survey, operating risks pose the greatest threat to insurers,” said David Lascelles, survey editor. “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.”
Regulatory risk, which has topped the last three editions of this survey, has fallen out of the top five this year, largely due to recent changes becoming more commonplace. However, the cost and complications associated with industry regulations remain a concern.
Instead, survey respondents cited the insurance industry’s ability to address the challenges of digitisation, new competition, consolidation and cost reduction as their top concern. This is being driven by new technologies which could transform insurance markets, such as driverless cars, the internet of things and artificial intelligence.
Second on the list is cyber risk, with insurers highlighting concerns about protecting their own data and the costs of underwriting cyber crime for their clients. Other major concerns include the adequacy of insurers’ internal technology systems and competition from the insurtech sector.
Other concerns highlighted on CSFI and PwC’s Banana Skins Index include economic instability, interest rates, investment performance, macro-economics, political interference, and the ability to attract and retain human talent.
One 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 since fallen due to regulatory pressure and initiatives from the industry.
“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,” said Mark Train, PwC’s global insurance risk leader. “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.”