Business practices tops insurance sector’s risks

Institutional risks such as business practices and quality of risk management are the top risks the Indian insurance industry currently faces. Growing concerns over “unethical sales practices” and a growing public distrust of insurers as a consequence of misselling – have driven reputational risk up to No. 7. Two more institutional risks – the quality of management and corporate governance –made to the top 10 in Insurance Banana Skins 2013, a biennial survey of insurance risks conducted by CSFI and PwC. 

On the question of how well Indian insurers are prepared to handle the risks identified, India scored at 2.73, below the global average of 2.95.

As in most of the world, the threat of overregulation is also a major concern particularly in the life insurance sector. Ranked notably higher in India than they were globally were the underwriting risks, particularly in natural catastrophes where there is a lack of understanding of probabilistic models and preparedness among Indian insurance firms.

Manoj K Kashyap, leader financial services, PwC India said, “Long driven focus on top line puts 'Quality of Management' and 'Business Practices' as two of the top five risk factors in India."Business Practices" has been a striking riser in the global survey from rank 18 to rank4 reflecting slippages in business standards during a hard market."

The survey this year revealed interesting findings. In India, over-regulation and under-writing risks are serious matters of discussion. On a happier note, the survey has had a healthier and more relevant mix of respondents comprising industry players as well as other constituents.

Lower-rated concerns included the risk around long-term liabilities and actuarial assumptions, which were seen by some respondents as quite conservative in India.

The global survey polled over 650 insurance practitioners and industry observers in 54 countries to find out where they saw the greatest risks over the next 2-3 years. This is the third successive Banana Skins global survey in four years which has identified regulation as the top risk concern for insurers globally, underlining the continuing uncertainty surrounding major regulatory initiatives.

From a global perspective a related set of risks lay in the area of business practices (No. 4), another area of regulatory scrutiny.  Despite the huge amount that has been done by companies and regulators to clean up practices such as mis-selling, this is still seen as an area of high risk particularly at a time of economic stress when pressure to generate sales is strong.

On the other hand, a number of risks have fallen in urgency, notably concern about the availability of capital to sustain the industry (down from No. 2 to No. 16 in global survey).  The situation is now reversed: there is excess capital in the industry, particularly on the non-life and reinsurance sides, which is keeping prices soft and hurting profitability.  Another receding risk, at least in developed markets, is human resources: the shake-out in the financial services sector has made it easier to recruit and keep good talent.  The situation is harder in emerging markets where qualified talent remains in short supply in many markets.

A breakdown of the insurance industry by sector shows the life side specifically concerned about the impact of low interest rates on investment performance, and the task of managing complex and competitive retail distribution networks. On the non-life side, the main concerns are with excess capacity and competitive pricing, along with the impact of surging catastrophe claims. Concerns in the reinsurance sector are mainly with the security of capacity in a highly competitive market.

Insurance Banana Skins 2013

Risk Ranking (India)

1. Business practices
2. Quality of risk management
3. Regulation
4. Natural catastrophes
5. Quality of management
6. Product development
7. Reputation
8. Innovation
9. Investment performance
10. Corporate governance
11. Human resources
12. Terrorism
13. Macro-economic environment
14. Guaranteed products
15. Capital availability
16. Distribution channels
17. Crime
18. Complex instruments
19. Change management
20. Reinsurance
21. Actuarial assumptions
22. Political interference
23. Climate change
24. Long tail liabilities
25. Pollution/contamination
26. Social media
27. Back office