OREANDA-NEWS. June 04, 2007. According to Insurance Banana Skins 2007 — joint PricewaterhouseCoopers’ and CSFI`s (The Centre for the Study of Financial Innovation) survey, examining major risks insurance sectors faces — there is a strong difference in perceptions of risks in Russia and abroad, reported the press-centre of  PricewaterhouseCoopers.

Russian Banana Skins

Management quality ranked number 1 of 33 risk categories by risk severity but only number 21 in the risk trends. This difference is perhaps not as surprising as it might first appear. It is reasonable to assume that management quality will show strong improvement, as the industry matures. There will also be beneficial impact from the increased presence of international players, bringing their knowledge and experience to the Russian market.

Long-tail liabilities (2 by severity and 15 by trend) risk got surprising rating given that the Russian market is dominated by relatively short tail products. However, it is true that the tail on motor and other liability claims is lengthening. Even though Russia is still a long way from seeing the litigation culture that has bedevilled the industry in other markets.

Investment performance representing risk number 3 carried the same importance for Non-Life and Life insurers. It ranked 3 by severity and 16 by trend. PwC interpretation is that respondents expect to see reduced volatility in financial markets in the future.

Managing the cycle ranked risk number 4 by severity and 11 by trend. As one might expect, it was with one exception of greater concern to Non-Life insurers and Re-insurers than to Life companies.

The ranking of Political shocks and pressure (5 by severity and only 22 by trend) suggests that respondents are not unduly concerned by the impact that any changes in the political landscape, might have for the insurance industry.

Retail sales practices are ranked 6 by severity and 5 by trend. It is clear therefore that respondents expect the item to remain high on management’s agenda for the foreseeable future. This seems entirely appropriate, not least because of the continuing interest of legislators and regulators in the industry’s sales practices.

Distribution channels are ranked 7 by severity and 12 by trend. However, like the Retail Sales Practices (see above), it was of greater concern to Life than Non-Life insurers. This may reflect the ongoing debate within the industry over the efficacy of different distribution channels.

The risk of Fraud ranked 8 by severity but fell to a lowly 27 on the risk trends. It is significant levels of interest in and concern over the perceived levels of fraud within the insurance industry, including but not limited to the problem of fraudulent motor claims.

Interest rates — ranked 9 by severity . The trend rating of 17 suggests an optimistic view of the performance of the economy in the coming years.

And finally, new types of competitors — this risk appears at 10 by severity but moves up to 6 by trend. It is clear that the industry is very awake to the threat of competition from non-traditional players.

To the question “How well prepared do you think your own and other institutions are to handle the risks you have identified?” 25% of respondents answered “well” and 75 % “mixed”. No respondents gave the third answer “poorly”.

Alex Bertolotti, Insurance and Pensions leader, PricewaterhouseCoopers Russia:
“The Research shows quite clearly that Russian and international companies look at risks differently. Now that a great number of international players are taking a closer look at Russian companies, while at the same time many Russian companies are actively trying to attract investment through such means as strategic participation (M&As) and launching an IPO, it will be well worth Russian companies paying particular attention to those risks which are of specific concern to insurance companies abroad.”

International Banana Skins

The burden of too much regulation is the greatest risk currently facing the insurance industry, according to this survey. More than 100 respondents to the survey say that excessive regulation is endangering the industry by loading companies with costs, distracting management and creating barriers to competition and innovation. This finding is linked to concern about growing political interference, particularly in markets where governments regulate insurance products and prices.

Jeremy Jensen, partner, PricewaterhouseCoopers, said:
“The focus on regulation will only increase over the next few years, as insurers face a number of new demands, not least the coming overhaul of financial reporting and Solvency II. A key challenge is to develop effective risk management systems which can provide both compliance and also improved business execution.”

Other high level risks identified by the survey include natural catastrophes and climate change, where insurance losses for the property and casualty sector are rising fast, particularly in heavily populated areas. The main risks facing the life insurance industry include growing human longevity and the soundness of assumptions going into the pricing of life policies.

The survey was conducted at a time when the traditional cycle in the property and casualty market is turning down. Respondents say that insurers are striving to maintain revenues by taking on extra risk, cutting prices and loosening the wording of insurance contracts. This raises concerns about the profitability of the industry, and the risk that insurers will be exposed to “long tails” — insurance risks that could take years to materialise.

The quality of management in the insurance industry is also a major source of concern. Responses to the survey show widespread doubts about the industry’s ability to meet growing challenges from regulation, new competitors, technological change and product innovation. The industry is also seen to be failing to attract new blood because of an image problem. Like regulation, the management issue is geographically widespread.

The survey also shows which risks are seen to be receding. Notable is asbestos, once the scourge of the industry, now at the bottom of the list with insurers feeling it is manageable. The problems of under-regulation are also low down the list, though it is felt that several emerging markets need better controls.

Although the survey exposes some potentially worrying risks, it also brings better news about the industry’s preparedness. Only three per cent of respondents think insurers are “poorly” prepared to meet the risks that lie ahead. Just over 20 per cent answer “well” and the rest give a mixed response.