Jun 13

Will Your Company Slip On the Investments Banana Skin?

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What’s a banana skin got to do with investments?   A lot if you are PwC or the Centre for Study of Financial Innovation.

By the way, when did accounting firms like PwC become consulting outfits that happen to audit financials?  I guess, we will leave that question for another day.

For now, let’s take a look at the new Insurance Banana Skins 2013 Survey, the “CSFI Survey of the Risks Facing Insurers.”

These are not your ordinary risks involved in writing insurance (the core business of this industry).  These are the risks seen most urgent by an international group of hand picked insurers and observers.

And we do mean, international, as North American (including Bermudan) respondents are only 14% of the survey, while Europe (46%) and Far East/Pacific (22%) are more prevalent.

The top banana skin named is the burden of regulation.  Although our industry is, by its very nature, subject to regulation, the risk is that regulation will go to such a level that it will negatively impact financial results (more so than it is currently doing).

However, if your company is navigating the treacherous waters of regulation successfully, it must then confront banana skin #2: poor investment performance, especially low interest rates.

We are already seeing insurers react to the current investment environment by reconsidering riskier assets as well as making changes to certain products.

On the investment side of things, we refer you to an earlier blog entry from the Northwest Quadrant that might assist during this low rate, QE infinity environment.

Of course, there are many other banana skins.  The macro-economic environment, business practices and natural catastrophes fill out the top five of a list that includes twenty-seven “skins” in all.

And, different banana skins tend to be more prevalent for different types of insurers.

For example, life insurers also see regulation as #1, but rank investments #4, while #2 (macro-economic environment) and #3 (guaranteed products) also have a lot to do with the current investment situation.

Unsurprisingly, natural catastrophes are ranked at #1 skin by non-life (property/casualty) insurers, while regulation stands as #2 and investments as #3.

And, reinsurers zone in on investments as #1, natural catastrophes as #2, and regulation as #3.

Different types of insurers may slant their skins in one way or another, but you can be sure that investments are a very challenging banana skin for all insurers.

We applaud the CSFI for their efforts in this study, as it brings a focus on the most urgent risks facing insurers today.  However, for those of us in the industry, we know all along where the banana skins are.  It is just a matter of finding the best way to dodge them…or at least cushion the fall.