Slip-ups on the road ahead

17-09-2019

Slip-ups on the road ahead

The latest Reinsurance Banana Skins survey by the Centre for the Study of Financial Innovation and PwC has shown that worries over technology and cyber risk are at the top of the 2019 list of concerns for reinsurers. Bermuda:Re+ILS examines the full findings of the report.

Concerns around the reinsurance industry’s ability to deploy new technologies and confront structural change top the list of risks—the banana skins—facing the global reinsurance industry in the first half of 2019, according to the biannual report by PwC designed to identify these key risks.

The report, Reinsurance Banana Skins 2019, shows that the reinsurance industry’s number one concern is rooted in fear that the industry is grappling with legacy IT systems as new data sources proliferate.

Its second biggest worry is cyber risk, which the report describes as a particular worry for reinsurers because of the largely unknown liabilities of underwriting cyber policies, as well as the threat of direct cyber attacks against insurance companies that hold valuable data.

Closely linked to these worries, the report notes, is the industry’s concern around change management. This also reflects concerns about insurance markets being upended by new technologies, and radical shifts in customer expectations, the report notes.

“Technology has risen to number one in reinsurers’ risk register. For reinsurers, tech-enabled efficiency gains are freeing up vast amounts of underwriting capacity, which can be refocused on emerging risks and closing the global insurance gap,” Stephen O’Hearn, global insurance leader, PwC Germany, and Andy Moore, global insurance risk & regulatory leader, PwC UK, say in a co-authored foreword.

“Technology has also opened up a proliferation of data from new sources such as sensors and internet of things connectivity, while ushering in ground-breaking advances in risk analytics. The results are revolutionising risk evaluation, underwriting and prevention. The big risk for reinsurers is being left behind as the industry is transformed.”

They add that in such a scenario, the front-runners also recognise that talent and access to data are as important as the systems themselves in steering successfully through the transformation.

“Reinsurers’ record of innovation and strong data and analytics capabilities also mean that they have an important role to play in leading and advising the insurance industry as a whole,” they write.

Potential vulnerabilities

The two leaders note that the appearance of cyber risk at second on the list of banana skins reflects both the accumulation of exposures and risk of unforeseen losses in their own and cedants’ portfolios on one side, and the potential vulnerabilities within reinsurers’ increasingly digitised operations on the other.

“We’re already seeing closer engagement with cedants and direct insureds as the industry looks to strengthen risk understanding and prevention.

“There are opportunities to take this further through developments such as the introduction of the kind of consistent risk scoring used in property cover and closer collaboration with digital security companies to help boost threat intelligence,” they write.

“The proactive risk management approach could in turn bolster the protection of reinsurers’ own systems, data assets and brand reputation.”

Arthur Wightman, territory & insurance leader at PwC Bermuda, adds: “Successful technological transformation isn’t just a systems issue. It demands buy-in and upskilling throughout the organisation—the workforce needs to embrace change and see this as an opportunity.”

The third biggest concern on the list is climate change, which received its highest ever score. The reinsurance industry expressed much anxiety about the costs of mounting claims from more frequent and severe natural disasters, and the prospect that some risks could become uninsurable, the report notes.

Rounding off the top five is regulation risk, up from eighth place two years ago, largely due to concerns about a raft of new rules such as the EU General Data Protection Regulation and IFRS 17. The remainder of the top 10 comprised mostly operating risks.

In the foreword, O’Hearn and Moore write: “The impact of climate change is at number three, a new entry in the top 20 and noticeably higher than for the insurance industry as a whole. From floods to wildfires, the frequency of events and the severity of reinsurers’ losses are mounting as once-sporadic events become almost commonplace.

“Even greater risks lie ahead if climate change continues on its current trajectory. Valuable assets could become worthless. Through modelling of the vulnerabilities and their impact, reinsurers have a central role to play in strengthening prevention and resilience worldwide.

“The industry can also bring hard numbers to the debate over how to tackle this grave and pressing global threat.”

At no. 6, investment performance reflected worries that low yields could encourage insurers to take greater investment risks to improve returns, the report suggests.

Doubts were raised at no. 7 about the industry’s ability to attract and retain human talent, particularly in technical areas. “The position of competition fell four positions from 2017, to no. 8, reflecting the view that while much disruption is being observed, competition is an opportunity for the industry as well a risk, and insurtechs are a partnering opportunity not a threat.”

On the other hand, cost reduction (up two positions to no. 10) and reputation risk (up five positions to no. 13) both rose this year. Political risk is also slightly higher at no. 9, with protectionism, populism and the spectre of trade wars particular concerns for the reinsurance industry, which has a global reach.

“Respondents were more sanguine about the macroeconomic environment (no. 11) and interest rates (no. 14), which were both down significantly from 2017, although they survey was taken early in 2019 before growing concern around current interest rate declines,” the report notes.

In the bottom half of the table, governance risks were generally seen as under control, particularly corporate governance (no. 18) and business practices (no. 15)—although quality of management is more of a concern for the reinsurance industry. The bottom cluster—including social change (no. 18), capital availability (no. 19), and the UKs departure from the EU (no. 20)—are largely unchanged from 2017.

In alignment

The survey also shows the extent to which the reinsurance industry shares a number of top risks with the broader insurance response from insurers, brokers, life companies, and other respondents.

A key difference is that the reinsurance industry places a great deal more emphasis on the threat posed by climate change. In fact, the score it assigned to this banana skin (3.86) is higher than the score of any banana skin ranked by the non-reinsurance response, the report notes.

Equally, technology and cyber risk are also considered more urgent within the reinsurance industry than outside it. However, regulation and investment performance are seen as slightly less severe.

The report also assesses reinsurance respondents in terms of how well prepared they think the industry is to handle the risks they identified. On a scale of 1 (poorly) to 5 (well), they gave an average response of 3.17, which is substantially higher than the average response of 3.02 in 2017. “This also indicates a higher degree of preparedness than that of the broader insurance industry, which gave an average response of 3.11 this year (up from 3.02 in 2017),” the report notes.

In the foreword, O’Hearn and Moore note: “If we look at the top five risks as a whole, what’s striking is the extent to which they feed into each other—technology is driving change management risks, for example, just as data regulation and cyber threats are heightening technology risks.

“This underlines the importance of looking at today’s fast-evolving risk landscape in the aggregate.”

About the report

Reinsurance Banana Skins 2019 surveys the risks facing the reinsurance industry in early 2019, and identifies those that appear most urgent to practitioners and close observers of the reinsurance scene around the world.

It examines responses submitted to Insurance Banana Skins 2019, which was published in June 2019 and examined the global insurance industry—including the life, non-life, composite, reinsurance and broking sectors.

In this report PwC considers the reinsurance industry to be broadly represented by respondents who self-selected into the ‘reinsurance’ and ‘P&C/non-life’ sectors. It is based on surveys completed by 320 respondents from 42 territories.

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