Insurance Banana Skins The CSFI s survey of the

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Insurance Banana Skins The CSFI s survey of the Powered By Docstoc
					Insurance
Banana Skins
2007The CSFI's survey of the
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    risks facing insurers


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Insurance
Banana Skins
2007The CSFI's survey of the


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    risks facing insurers


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      This is a companion piece to the Banking Banana Skins survey that my colleague David Lascelles has been
      preparing for the CSFI, more or less annually, since 1996. The last BBS report was published in June 2006, and it
      prompted PricewaterhouseCoopers (which has supported the survey financially for some years) to suggest that we
      apply the same methodology to the insurance industry.

      We were happy to agree – and not just because PwC is again providing financial support. The insurance industry is
      all about risk – to paraphrase the unlamented Mr Rumsfeld, both the risks we know and the risks we don’t. And the
      links with the banking industry are obvious.

      So, too, are the differences. Indeed, the CSFI is shortly to publish another report (by an insurance industry lifer)
      which makes a powerful case that bankers and insurers speak completely different languages and are unable to
      communicate with each other except by semi-human grunts.

      This makes it rather remarkable that David has been able to carry over, largely intact, the model that we have
      developed over the years for identifying the banana skins (banana peels, for our American cousins) on which the
      hapless banker, or insurer, is likely to slip. Of course, the carry-over isn’t perfect, but it has worked better than I
      had expected – and I am impressed by the fact that over-regulation is almost as big a bugbear in the insurance sector
      as it is in banking. True, it is a concern that is particularly dominant in the life sector – which is as much about
      savings as it is about insurance. But, in this year’s sample at least, it is at the top of the list.

      Other risks – notably the quality of management within the industry, the complexity of insurance products, the
      insurance cycle itself – are perhaps more predictable, at least to an outsider. On the other hand, I was certainly
      surprised that there wasn’t more concern about the mispricing of new risks (No 17 on our list) and about the spread
      of a litigation culture.

      Whatever, the intention of this report is not to be a dry-as-dust academic analysis. It is to provide a good, lively tour
      d’horizon of where a range of insurance practitioners and observers believe the major risks in their industry lie – and
      to provoke thought, discussion and (perhaps) apoplexy. As always, I am very grateful to my colleague, David
      Lascelles, for the time and effort he puts into preparing the questionnaire, analysing the (very high-level) responses
      and writing up the report. I am also very grateful to PwC for providing the financial assistance that makes the whole
      exercise possible.

      Andrew Hilton
      Director, CSFI.




                                      This report was written by David Lascelles
                                          Cover design by Octavius Murray


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    Foreword
    Welcome to Insurance Banana Skins 2007, the inaugural survey of the risks facing insurers worldwide, which has
    been produced by CSFI in association with PricewaterhouseCoopers.

    PricewaterhouseCoopers is delighted to be sponsoring this valuable initiative, following our longstanding support for
    the Banking Banana Skins surveys. The unique format of the Banana Skins series provides a fascinating insight into the
    emerging and ever-present risks and concerns at the top of the boardroom agenda and how these perceptions change
    over time. The overall ranking of risks is augmented by individual sections for particular sectors (life, reinsurance,
    property & casualty etc), along with key stakeholders such as brokers and observers (analysts, regulators etc).

    While risk is clearly at the heart of insurance business, growing compliance and competitive pressures are creating
    fresh headaches for the insurance industry. The number one banana skin in this survey, as with banking, is concern
    about over-regulation. Such misgivings can only increase over the next few years as insurers face a number of new
    demands, not least the coming overhaul of financial reporting and capital controls in many parts of the world. The
    key challenge going forward is how to develop effective enterprise-wide risk management systems capable of
    providing both a sound platform for complex and multifaceted compliance and an enhanced basis for decision-
    making and strategic execution.

    The other prominent Banana Skins at the top of the survey are equally revealing. The threat from natural catastrophes
    (second ranked risk overall) and associated climate change (fourth ranked risk overall) clearly requires ever more
    careful risk selection, control and diversification. The terrible losses arising from Hurricane Katrina, the European
    floods and other recent disasters also underline the immense and all too easily forgotten importance of insurance to
    the social and economic fabric of everyday life. As Adam Smith said, ‘insurance gives great security to the fortunes
    of private people, and by dividing among a great many that loss which would ruin an individual makes it full light
    and easy upon the whole society’.

    Areas where the perceived Banana Skins differ from banking include its greater focus on management quality
    (number three in the insurance survey, but not even in the top 30 for banking). The insurance industry clearly needs
    to be able to offer the rewards, both financial and professional, to attract and retain the brightest and the best.

    I hope that you find this survey insightful and thought-provoking, If you have any feedback or would like to discuss
    any of the issues raised in more detail please do not hesitate to contact myself or one of my colleagues.

    Finally, I would like to thank Jeremy Jensen, one of our partners in London, for the original idea of taking ‘banana
    skins’ into the world of insurance, and the CSFI for producing such an interesting read. I am looking forward to the
    second edition.

    Ian Dilks
    Global Insurance Leader
    PricewaterhouseCoopers




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      About this survey…                                                          Observers
                                                                                    11%
                                                                                                      Broking
                                                                                                        6%
      This survey was conducted in February and March 2007, and is based on 139 responses from 21 countries and one
      multinational organisation. The questionnaire (reproduced in the Appendix) was in three parts. In the first,
      respondents were asked to describe, in their own words, their main concerns about the insurance sector over the next
                                                                         Reinsurance
      2-3 years. In the second, they were asked to rate a list of potential Banana Skins, both by severity and whether they
                                                                             14%
                                                                                                                     Life
      were rising, steady or falling. In the third, they were asked to rate the preparedness of insurance institutions to
                                                                                                                    34%
      handle the risks they identified. Replies were confidential, but respondents could choose to be identified.

      The breakdown was:

                                      Argentina                2       Netherlands          4
                                      Australia                6       New Zealand    Property &
                                                                                            6
                                      Bahamas                  1       Portugal        casualty
                                                                                            3
                                      Belgium                  2       Russia            35%6
                                      Bermuda                 13       South Africa         6
                                      Canada                   6       Spain                1
                                      France                   5       Switzerland         11
                                      Germany                  5       Thailand             5
                                      Hungary                  2       UK                  36
                                      Italy                    3       Ukraine              1
                                      Multinational            1       US                  14

      The chart shows the breakdown by type of respondent.


                                              Observers
                                                                        Broking
                                                11%
                                                                          6%



                                        Reinsurance
                                            14%
                                                                                      Life
                                                                                      34%




                                                   Property &
                                                    casualty
                                                      35%


      The seniority of the respondents was high: over 80 per cent identified themselves as senior executives or directors.




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                       The burden of too much regulation is
                       the greatest risk currently facing the
                       insurance industry, according to this           Insurance Banana Skins
Too much               survey of insurance practitioners and                    2007
regulation tops the    observers. New rules and compliance
                       requirements      are    eroding   the            �    ��������������������
list of risks…                                                           �    ���������������������
                       profitability of the industry and
                       distracting management from the task              �    �������������������
                       of running an efficient business.                 �    ���������������
                                                                         �    �������������������
                       Concern about over-regulation is                  �    ����������������������
                       geographically widespread, affecting              �    ����������������������
                       markets in North America, Europe and              �    ����������������������
                       Asia Pacific. Sectorally it is strongest          �    ����������������������
                       in the life insurance sector, followed by        ��    �������������������������
                       property & casualty.                             ��    �����������������������
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                       The sharp rise in natural catastrophes           ��    ���������������
                       is the number 2 risk in the industry, led
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                       by concerns in the property & casualty
                                                                        ��    ������������
                       and reinsurance sectors. The growing
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                       incidence of catastrophe in highly
                       populated areas makes this a difficult           ��    ������������������
                       risk to price.       These concerns are          ��    ����������
                       closely linked to risks associated with          ��    ��������������������
                       climate change which came in at No. 4.           ��    �����������������������
                       These classes of risk were seen to be ones       ��    ����������
                       that were rising fastest.                        ��    ���������������
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                       The quality of management (No 3) is              ��    �������������������
                       a big worry at a time when the industry          ��    �����������������
                       faces huge pressures on the business             ��    ���������������������
                       and regulatory fronts. There is also
    …but is            apprehension that insurance companies
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    management up to   may be failing to attract enough new             ��    ����������������������
    the job?           blood to build future management
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                       capability.
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                       The insurance cycle in the property
                       and casualty sector is in its downward           ��    ���������
                       phase (No 5), which will test the
                       industry’s ability to handle a soft market. A particular concern is the presence of
                       new competitors such as investment banks and hedge funds (No 10) who are
                       adding capacity to the market and driving down prices, but whose ability to
                       withstand the difficult phase of the cycle has yet to be tested. Concern about cycle
                       management was most marked in the property & casualty and reinsurance sectors.
                       The availability of capital was voted the least of the industry’s concerns outside the
                       reinsurance sector.



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                                               The survey exposed questions about the industry’s management of longer term
                                               risks and the impact of greater longevity. Many respondents felt the industry was
                                               being slow to adjust to changes in how long people live, and that its dependence on
                                               actuarial assumptions was both excessive and a sign of its conservatism. Longevity
Political pressures                            issues (No 9) were of particular concern to the life sector, while the property &
are building up                                casualty/reinsurance sectors focused on long tail liabilities (No 7).

                                               Questions about the industry’s investment performance (No 11) centred mainly on
                                               its ability to manage some of the new-fangled investment classes which have
                                               appeared on the market, such as derivatives and hedge funds. There was less
                                               concern about its exposure to more conventional investment markets such as
                                               equities (No 13) and interest rates (No 22).

                                               Outside the tops risks, notable findings included political shocks and pressures
                                               (No 16) which showed the industry to be facing strong governmental interference in
                                               many countries: the US, Canada, New Zealand, Russia and several emerging
                                               markets. This pressure usually takes the form of obligations to provide insurance of
                                               a type and at a price set by government.

                                               Although concern about the quality of corporate governance (No 23) in insurance
                                               companies is relatively low, the survey showed that the industry is worried about its
                                               reputation, both as a business partner, and as a career prospect.

The industry’s                                 Striking too are the lowest risks: too little regulation came one from the bottom at
state of                                       No 32 (though some respondents felt more could be done to increase international
                                               cooperation) and asbestos (No 33), once the scourge of the industry but now
preparedness is                                distinctly passé.
‘mixed’
                                               Preparedness
                                               The survey sought views on how well prepared the insurance industry was to handle
                                               the risks that had been identified. The majority of the respondents felt preparedness
                                               was “mixed”. Just over a fifth answered “well”, and only three per cent thought the
                                               industry was poorly prepared.




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                     ��������������
                     Brokers
                     Brokers were concerned about the quality of
Over-regulation is   management in the primary insurance
                                                                            �    �������������������
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the bugbear of the   companies: how well they were run, how they
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life industry…       managed the cycle and secured capital. They
                                                                            �    ���������������
                     were also interested in processes: distribution
                     and the back office. The specific risks that           �    ���������������������
                     concerned them were the growing use by                 �    ����������������������
                     insurance companies of complex instruments,            �    ������������
                     climate change, long tail liabilities and              �    ����������������������
                     catastrophe risk. They were conspicuously              �    �������������������������
                     less worried than other groups by over-               ��    ���������������������
                     regulation (which came 13th on their list).




                     Life insurance
                     The life insurance industry had the strongest
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                     concerns about over-regulation and the related
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                     risk of political pressure. Other worries lay
                                                                           �    ���������������
                     close to the nature of the business:
                                                                           �    ����������������������
                     distribution, interest rates, equity markets,
                     policyowner longevity and investment                  �    ������������������������������
                     performance. Life insurers also saw new               �    �����������������������
                     competitors in the savings market posing a            �    �������������������
                     risk. They showed the strongest concern with          �    �����������������������
                     retail sales practices among the respondent           �    ���������������
                     groups.                                              ��    �������������������������




…while property &    Property & casualty
casualty has its     The property & casualty sector was concerned          �    ���������������������
                     with major sources of loss: catastrophes and
eye on natural       climate change.      It also focused on the
                                                                           �    ���������������
catastrophes         challenge of managing the insurance cycle,
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                     the problems of long tail liabilities, and
                     distribution channels. P&C insurers shared            �    �������������������
                     other sectors’ concerns with the quality of           �    ����������������������
                     management in the industry, but were less             �    ����������������������
                     bothered than the life sector about over-             �    �����������������������
                     regulation.                                           �    ��������������������
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                                               Reinsurance
                                               Reinsurers were mainly concerned with the          �   �������������������
                                               problems of managing the insurance cycle at
  The downturn in                              a time when it is turning down. They were
                                                                                                  �   ���������������������
                                                                                                  �   ���������������������������
  the cycle is the                             also concerned with major risk issues: natural
                                                                                                  �   �������������������
  worry for                                    catastrophes, long tail liabilities and risk
                                                                                                  �   ����������������������
                                               management techniques. Capital availability
  reinsurers                                   was a preoccupation. Their concerns with           �   ��������������������
                                               management quality focused on the primary          �   ������������
                                               insurers. They were less concerned with            �   ���������������������
                                               over-regulation than the life and property and     �   ����������������������
                                               casualty sectors.                                 ��   �������������������������������


                                               Observers
                                               Observers of the insurance industry               �    ��������������������
                                               (regulators, consultants and analysts) focused    �    ���������������
                                               strongly on the quality of management in the
                                                                                                 �    ���������������������
                                               industry: they questioned its ability to handle
                                                                                                 �    �������������������
                                               innovation and major types of risk.       They
                                               had less sympathy with the industry’s              �   ����������
                                               concerns about over-regulation and rising          �   ����������������������
                                               competition.                                       �   ������������
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                                               Risers
                                               The fastest-rising risks were all very topical:
  Headline risks are                           climate change, catastrophe, pollution and
                                                                                                  �   ���������������
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  the fastest risers                           terrorism.       The problems of growing
                                                                                                  �   ����������
                                               competition and regulation also featured
                                               strongly. Although demographic trends and          �   ����������
                                               merger mania came low on the overall               �   �������������������������
                                               rankings, they were seen to be among the           �   ��������������������
                                               faster rising risks.                               �   ����������������������
                                                                                                  �   ��������������������
                                                                                                  �   �������������������
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                                               Fallers
                                               Falling risks included the availability of         �   ���������������������
                                               capital and under-regulation.      Asbestos is     �   ����������������������
                                               yesterday’s story, as is business continuation.    �   ���������
                                               Concerns about the strength of actuarial           �   ������������
                                               assumptions are receding, so are internal
                                                                                                  �   ����������������������
                                               management issues such as risk management
                                                                                                  �   ����������������������
                                               and corporate governance. The risks posed
                                                                                                  �   ���������������
                                               by interest rate volatility were also
                                               considered to be manageable.                       �   ���������������������������
                                                                                                  �   ���������������������
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                         1. Too much regulation
                         The rising burden of regulation emerges as the greatest risk currently facing the
                         insurance industry. The steady flow of new laws and rules is piling costs on to
                         insurance companies, stretching their resources and diverting management from
                         running the business. The chief executive of a major UK life insurer said regulation
    Regulation is        was becoming “ever more intrusive, time-consuming and box-ticking. This is
    ‘strangling’ the     despite the rhetoric about principles-based regulation.”

    industry             Regulatory overload is a worldwide phenomenon: it was cited by respondents from
                         most of the countries in the survey. The chief executive of a large South African
                         insurer complained of “regulatory strangling”, while his opposite number at a New
                         Zealand property & casualty company saw “regulatory overkill which adds no
                         further to consumer protection but which stifles innovation and responsiveness.”
                         Comments in a similar vein were received from countries such as the US, Italy,
                         Switzerland, Australia, Portugal, Hungary, Thailand and Russia.

                         The over-regulation issue came through particularly strongly from the life insurance
                         sector, which voted it top Banana Skin. The chief executive of a large Canadian life
                         company said: “The overall regulatory burden is growing alarmingly. The
                         zealousness of regulators, the activism of corporate governance ‘pundits’ […] are
                         creating a nightmare scenario.” Other sectors placed it lower: property & casualty
                         4th, reinsurance 6th and brokers 13th.

                         Among the specific concerns were:

                         Too much change. The sheer volume of regulatory change – new rules on capital,
                         conduct of business, accounting and governance – is seen as a major intrusion. The
    Too many bad and     chief executive of business strategy at a South African life company said the
                         industry could barely keep pace with new initiatives. In the US, the chief financial
    inconsistent rules   officer of a life company tried to take a balanced view. “The changes in regulatory,
                         rating agency and accounting will provide some benefits and improvements, but will
                         be a major distraction and resource drain.”       The pace of regulatory change was
                         particularly emphasised in countries where insurance regulation is under review,
                         including South Africa, Canada, New Zealand, Hungary, Argentina, Thailand and
                         the Ukraine.

                         Quality. The quality of regulation was widely questioned. In Bermuda, a
                         respondent complained of the “inconsistent and opaque notions” of rating agencies
                         and regulators. From Hungary, the chief financial officer of a general insurance
                         company said that “regulation does not fit the needs of the industry, both customers
                         and insurers”. In Russia, Gennadiy Galperin, executive director of Rosgosstrakh,
                         saw “weak regulation of the insurance market by the Federal Services for Insurance
                         Supervision, also the Ministry of Finance.” Several respondents said regulation had
                         become too prescriptive and rule-driven. The “gold plating” of EU regulations,
                         was a particularly British concern. Adrian Colosso, chief executive of insurance
                         brokers Heath Lambert complained of “over-regulation from Europe being
                         excessively implemented within the UK”.

                         Lack of consistency. Rules differ from country to country, and even within
                         jurisdictions, for example between domestic and foreign firms. A Swiss reinsurer
                         complained of the “burden of inconsistent national requirements”. There was “too
                         much in US, too little in the global markets,” said a Bermuda-based respondent.
                         The burden also fell heaviest on smaller companies. In Portugal, the executive
                         director of a domestic insurer was concerned about “the ability of small but efficient

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Solvency II and                                companies to survive in a global
IFRS… it’s a lot to                            market where regulatory and capital        ������������
                                               exigencies are rising.”                    ����� ������������ �������� ���� ����� ���
digest                                                                                    ���������������� ������������������������
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                                               Solvency II. The EU’s new Solvency         ������������ �������� ������ �����
                                               II capital regime for insurers will add    ���������������������������������������
                                               to the regulatory burden. The head         ������� ����� ������ ����� �����������
                                               of group risk at a large UK life           ������������������������������������
                                               company said that “the main risk is        ���������� ����������� ������������ � �����
                                               that Solvency II (despite great            ����� ����������� �� ������ ���������� ����
                                               promise initially that it would be a       ����� ����������� � � ��� ���� ����� ������
                                               truly risk-based and economic              �����������������������������������������
                                                                                          ������ ��� ��������� ����������� �����
                                               framework) turns out to be a political     ������������ ������������������
                                               compromise that ends up costing
                                               billions to implement and results in
                                               perverse incentives and unintended consequences for the industry.” Many
                                               respondents saw the disruption caused by Solvency II coinciding with the new stage
                                               of international financial reporting reform, IFRS Phase 2. One leading insurer saw
                                               these as “potentially negative”.


                                               2. Natural catastrophes
                                               The sharp rise in catastrophic events put this Banana Skin high on the list,
                                               particularly for the property & casualty and reinsurance sectors who voted it No 1
                                               and No 2 respectively.       A regulator said that he saw growing “pressure on
European floods,                               individual firms and systems from natural disasters.”
Californian                                    Among the catastrophes mentioned were avian ‘flu, natural disasters, tsunami, flood
earthquakes                                    and climate change, with the nightmare scenario being two or more at once:
                                               European floods plus a Californian earthquake, a major catastrophe plus a collapse
                                               of the financial and currency markets.     Some respondents said that the problem
                                               was not so much natural disasters as the fact that hurricanes and earthquakes now
                                               caused more damage because of population concentrations. “The threat is of
                                               increased catastrophe frequency and severity colliding with increased
                                               urbanisation/population growth,” said the executive in charge of strategy at a leading
                                               Australian insurer.

                                               The issue was not merely the growing number of events, but the industry’s ability to
                                               price these risks and manage them. The president of a US brokerage firm believed
                                               that exposure management was critical. “We have had two large events – 9/11 and
                                               Katrina in the last five years…Soft market trading conditions will only make this
                                               more difficult,” he said.


                                               3. Management quality
                                               The perception that insurance management may not be up to the challenges facing
                                               the industry emerged strongly from the survey.          Weaknesses cited by our
                                               respondents included poor adaptability and strategic vision, low calibre personnel,
                                               and the failure of the industry to attract new talent.

                                               As with over-regulation, this concern was geographically widespread, being cited as
                                               a problem in the UK, the US, Canada, several Continental countries, East Europe,

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                      South East Asia, Australia and New Zealand. Sectorally, it was most marked
                      among insurance brokers (who voted it No. 1) followed by reinsurance (4th),
                      property & casualty (5th) and life (7th).

                      Much of the concern centred on management’s ability to handle mounting pressures
                      and complexity. John Tattersall, partner of PricewaterhouseCoopers, said: “The
‘Technicians still    global insurance industry is facing significant regulatory challenge which will put
rule over             strain on management. This is occurring at
                      the same time as increased competition
businessmen’          from new types of competitors hits the
                                                                          ���������� ����������� ��� ���
                                                                          ������ ���� ������ ���� �����
                      industry – whether for savings or risk              �����������������
                      transfer – and will also lead to merger             �����������
                      pressure. It’s a tough time for insurance           ����������������
                      managers!”         A UK-based consultant            ��������������
                      asked: “Can institutions respond to the             �����������
                      changed marketplace or do they just talk a
                      good story?” Lack of innovation, flexibility and consistency were often cited. One
                      respondent said that while the backgrounds of insurance managers were becoming
                      more diversified, “technicians still rule over businessmen.” Others pointed to the
                      dominant position that actuaries still held in large parts of the business.

                      Recruitment is a problem. The group chief accountant of a large UK composite
                      insurer complained about the difficulty of “finding enough people and keeping them
                      motivated in an increasingly regulated environment.” The lack of qualified
                      personnel was specially mentioned in Portugal, Italy, Canada, Thailand, Bermuda,
                      New Zealand and Australia. The chief executive of a large Russian reinsurance
                      company described it as “an eternal problem”.

                      Many respondents saw staffing difficulties getting worse as the industry failed to
                      replace an ageing workforce or attract better people, particularly the more highly
                      qualified. A London broker said: “Lots of experience has left the market”.       An
                      Australian insurance executive forecast “a talent shortage as the workforce ages in
                      many economies and insurance is not the first choice, typically, for graduates.”
                      The low appeal of insurance careers was blamed on an image problem in the jobs
                      market: one actuary pointed to “the old-fashioned nature of the industry, real or
                      perceived”. But another respondent thought the industry was itself partly to blame.
                      The technical skills of underwriters and claims personnel were deteriorating because
                      insurance companies needed to cut their costs or increase market share, he said.


                      4. Climate change
                      Climate change was the No 2 concern for the property & casualty sector, and was
                      seen overall by our respondents as the fastest rising risk. Flood, storm even fire
                      hazard were all mentioned as potential sources of loss.
No surprise to find
climate change        Aside from the risk of loss, though,          ���� ������ ���� ����� ���������� ���������
                      many respondents focused on the
high on the list      uncertainties surrounding this area, as
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                      well as the quality of the industry’s         ���� ������� ��� ����� �������� ���
                      response.     An insurance industry           ��������������
                                                                    ����������������������������
                      analyst said there were questions both        ��������������������������
                      about “the ability of primary insurers
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�����������������������

                                               and reinsurers to manage risks associated with climate change, and concerns about
                                               the extent and cost of coverage from the perspective of consumers and business.”
                                               The strategy director of an Australian company said this was “the hot topic as the
                                               industry tries to understand in detail its impacts and strategic responses, including
                                               opportunities,” but a UK insurance company director added: “It is almost impossible
                                               for the insurance industry to predict its effect and to react.”

                                               Looking beyond the immediate impact, a UK respondent feared that climate change
                                               would give people “new opportunities to claim compensation,” and that the industry
                                               might suffer “adverse consumer and media comment linked to this”.


                                               5. Managing the cycle
                                               The ups and downs of the insurance cycle are a major challenge for the property &
                                               casualty and reinsurance industries, particularly now that the market is softening
                                               again.    Declining premiums, plentiful capital and the possibility of a global
                                               economic downturn all threaten insurance company performance.

                                               The chief financial officer of a US property & casualty company saw the danger of
                                               “a potential prolonged soft market that results in irrational pricing and behaviour.”
‘Poor cycle                                    This will test management’s skills. “Poor cycle management is now a major risk,”
management is                                  said the director of a UK insurer.
                                               Many respondents pointed to pressure
now a major risk’                              from rating agencies to sustain
                                                                                            ���� ���������� ����������� �������� ��� ���
                                                                                            ����� ��������� ��������� ������ �����
                                               performance through the cycle’s lows         �������������������������������
                                               as well as its highs, pitching further       ������������������
                                               challenges at management.                    ������������������

                                               Some respondents felt that the cycle was becoming sharper, requiring a more
                                               disciplined approach by insurance companies. The chief executive of a Russian
                                               reinsurance company complained that “the up cycle is too short, and the down
                                               cycles are becoming more and more pronounced, especially in light of easily
                                               available capital.”  This made “entry into the non-life business easy and exit
                                               difficult”, he said.


                                               6. Distribution channels
                                               The high cost of traditional distribution channels, and the emergence of new web-
                                               based means of selling products pose risks to established ways of doing business,
                                               particularly the commission-based distribution system in the UK life market.

                                               Trevor Matthews, chief executive of Standard Life Assurance, saw “the need to
                                               improve the professionalism of distribution systems”. The planning director of a
                                               large UK life company said that “the inherent lack of profitability in life and
                                               pensions distribution channels” would continue to add cost pressures to product
                                               providers.      Many respondents expected to see a big shake-up of distribution
                                               structures.

                                               Although much of the comment we received on this Banana Skin concerned the UK
                                               market (one British respondent described it as “the big issue” for 2007), pressures


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 �����������������������

                     on distribution were also mentioned in other countries. The chief executive of a
                     large German insurer saw it as a challenge “especially in new markets”.


                     7. Long tail liabilities
                     Long tail liabilities (claims that crystallise after a long period) continue to pose a
                     challenge to insurers, particularly as regards pricing. The ability “to understand and
 The sting is        price long tail risk,” remains key, according to Daniel Hofmann, chief economist at
                     Zurich Financial Services. A New Zealand insurer agreed. “The assumptions
 in the tail         around pricing for long tail business” are among the big risks, he said.

                     Some respondents saw this risk in terms of poorly drawn contracts which allowed
                     liabilities to drag on. “The pricing of long term liabilities on general insurance and
                     life risks remains problematic,” said a UK insurance official. “It may always be thus,
                     in which case we need a clearer set of limits on insurance cover.” An Australian
                     director of strategy thought that “with tort reform in a number of jurisdictions, the
                     risk is that releases have masked real trends.”


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                     8. Actuarial assumptions
Beware ‘the          What one respondent called “the tyranny of the actuary” helped push this Banana
                     Skin up the rankings. The industry’s adherence to the pronouncements of actuaries
tyranny of the       was widely seen not only as the cause of poor insurance decisions, but also as a sign
actuary’             of its obsolescence.

                     The finance manager of a New Zealand property & casualty company said that the
                     general insurance sector “was overly impacted by the actuarial profession in setting
                     conservative reserving levels.” “Actuaries forecast the past” said a UK industry


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 �����������������������

                                                expert. An Australian insurance executive said “the problem is not so much the
                                                accuracy of estimates, rather the failure to act quickly when error is spotted.”

                                                Several respondents made the point that the accuracy of actuarial assumptions will
                                                become more critical in the period ahead as the insurance industry enters a softening
                                                market.


                                                9. Longevity assumptions
                                                As people live longer, longevity risk for health care and life insurers is rising. As
                                                might be expected, this Banana Skin was a particular concern for the life sector
                                                which voted it 4th.

Problems in the                                 The focus of many responses was the impact of longer life on the savings side of the
bulk annuity                                    business, annuities and pensions, and insurers’ ability to fund their obligations. A
                                                London insurer said: “With improvement in health care (and potential advancement
market                                          of cures for the major terminal illnesses) longevity is a key risk for the industry.”
                                                Another UK insurer saw this risk particularly “in the context of pricing in the
                                                growing bulk annuity market” where poor longevity assumptions could oblige
                                                companies “to pay out too much in annuities.” A Swiss respondent saw longevity
                                                risk turning into “a killer” for a potentially underfunded pensions business.

                                                The growing use of genetics to predict life expectancy could make product
                                                development more difficult, according to one consultant.


                                                10. New types of competitors
                                                Insurance is under attack from new competitors on many fronts. On the wholesale
                                                side, hedge funds and venture capitalists are creating new capacity, and investment
                                                banks are inventing new risk management products. On the retail front, banks are
                                                eating into the savings market, supermarkets are selling insurance, and the Internet is
                                                providing a platform for electronic distribution channels and price aggregators (web
                                                sites which collect and compare prices).        The responses to this Banana Skin
                                                conveyed a sense of an industry under siege.

                                                It is not merely the fact of new competition that causes concern, also its potentially
                                                low quality. Many respondents felt new competitors might fail when the going got
                                                tough, causing losses and bringing the industry into disrepute.

                                                Excessive capacity is a problem.
                                                                                               ������� ��� �������� ����� ������ ������
 Too much ‘naïve’                               “There’s too much naïve capital
                                                                                               �����������������������������������������
                                                supporting incompetent underwriting,”
 capital in                                     said Michael Butt, chairman of
                                                                                               �������� ������ ������ ��� ���� � ���� ����� ���
 underwriting                                   Bermuda-based Axis Capital.           The
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                                                chief executive of a large South African
                                                                                               �����������������
                                                life company saw “uninformed outside
                                                                                               �����������������
                                                parties bringing instability to our
                                                markets”. In Switzerland, the financial
                                                controller of a reinsurance company said that “the involvement of hedge funds and
                                                other financial institutions in certain special purpose vehicles is likely to influence


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                      the pricing level and duration of future cycles. It is unclear how these companies
                      will respond to a major catastrophe.”

                      Innovative risk transfer techniques introduced by investment banks also pose a
                      challenge. The ideas coming from this direction were “ahead of the rest”, according
                      to the claims director of a leading risk management consulting company. Direct
                      competition from banks and fund managers in the savings market was a particular
                      concern. (See box)

                      For some less developed markets, the competitive challenge comes from foreign
                      entrants, who tend to be better capitalised than the locals and able to win market
High entry barriers   share. The chief financial officer of a Russian life company saw his greatest threat
are keeping out       in “the rise in competition due to other financial market institutions (banks, unit
new blood and         investment funds) and the emergence of new foreign market traders.”               A
                      respondent in Thailand said that foreign insurance companies enjoyed “a highly
ideas                 competitive advantage.” In the Ukraine, the deputy chairman of a life company
                      complained of “unfair competition”.

                      But some respondents felt all this was self-serving and overdone. Several made the
                      point that the industry’s problem was the exact opposite: a failure by new blood and
                      ideas to overcome the high entry barriers set by regulation. A finance manager in
                      New Zealand said that the industry’s greatest problem lay in “lack of innovation and
                      new entrants”.


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                      11. Investment performance
                      Concerns about insurance companies’ investment performance centred on their
                      ability to cover policyholder benefits as markets turn more uncertain. This Banana
                      Skin was a particular concern of the life industry (who voted it 6th) and property &
                      casualty (8th).




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�����������������������

                                               “It is difficult to outperform cash!” said a UK respondent of the challenge facing the
                                               industry from the low investment yields currently available in many markets.

                                               But there was an additional concern over market innovation, and the new but risky
                                               investment propositions this was throwing up, for example in the areas of private
                                               equity and hedge funds.. “It is becoming a challenge for senior management to
                                               understand new investment categories”, said a respondent from one of the big rating
                                               agencies. An industry analyst wondered whether insurers would be able “to manage
                                               new financial risks … (eg credit risk acquired through buying credit derivatives) and
                                               exposure of investment portfolios to certain types of investments (eg hedge funds,
                                               sub prime mortgages).”

                                               If companies failed to earn sufficiently high returns, it was not always their fault.
                                               One UK respondent blamed external influences (the Financial Services Authority
                                               etc.) for trying to “influence their investment criteria.”


                                               12. Managing technology
                                               Weaknesses on the technology front are a problem, particularly the obsolescence of
                                               IT systems, and the risks that insurers run when trying to update them. This Banana
Fears of                                       Skin came highest for the property & casualty sector (9th, versus life 16th).
‘technology
meltdown’                                      Many respondents said the industry was hampered by paper-based or antiquated IT
                                               systems which failed to track data and keep management properly informed. “The
                                               rate of adoption of new technology is low,” said a UK insurer. One UK broker
                                               feared the situation was so bad that the industry faced “technology meltdown”. A
                                               Portuguese respondent described data quality as “abominable”.

                                               One of the concerns was that technological backwardness would hamper the
                                               industry as it sought to compete with better-equipped new entrants to the business.
                                               According to a UK consultant, the convergence of savings products provided by
                                               insurers and banks meant that life insurers “will require increasingly sophisticated
                                               systems”. The vice-president in charge of risk controls at a Canadian non-life
                                               company said the industry “requires huge reinvestments to achieve real time
                                               information and a reduction of its cost base.”


                                               13. Equity markets
                                               With their heavy dependence on investment performance, the growing uncertainty
                                               surrounding the outlook for equities poses a potential risk for the industry,
Insurers are better                            particularly the life sector which put this risk in 9th place. “Rising equity markets
at handling                                    have improved capital availability and delivered good investment performance,”
                                               said the planning director of a UK life company. “But market risks are on the rise.”
volatility                                     Respondents saw the possibility of greater turbulence in equity prices, even of a
                                               market crash, with UK companies more exposed than most.

                                               Geographically, the focus is on the US markets, from which most other markets will
                                               take their lead, though the growing linkage between equity markets also makes it
                                               harder for insurance companies to diversify their equity risks.



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                        But other respondents viewed this risk as less of a threat than in past economic
                        cycles, with insurers now more sheltered from equities, and wiser at managing
                        difficult markets. “There is better matching across the industry,” said the chief risk
                        officer of a large UK life company. A New Zealand CEO agreed. “There is greater
                        [market] volatility, but companies can diversify their risks,” he said.


                        14. Risk management techniques
                        The challenges in this area were summed up by a European underwriter: “Can [the
Do insurers             insurance industry] develop strong and flexible risk management processes/models
                        that are able respond in an effective way to a fast-changing environment?”
understand
complex                 Some respondents were doubtful. The chief financial officer of a US life group
products?               said that “companies are offering very complex products, often with limited ability
                        to understand and quantify risks”. A London-based consultant wondered whether
                        it was even known “where risk sits and who owns it in each institution”.          The
                        director of strategic options at a large UK insurance group felt that risk management
                        was still not built deeply enough into the day-to-day management of the business.
                        Insurance companies should “articulate [their] appetite for risk in a measurable way”
                        and make the risk assessment process more challenging so that it was not just “a
                        routine form-filling exercise”.

                        In the less developed world, this was one of the areas where the shortage of qualified
                        and experienced personnel was most keenly felt and where, therefore, concerns
                        about the strength of risk management were highest.

                        One dissident from these views – a UK insurer – said that “insurers have moved
                        beyond insurance risks and have made significant progress managing other risks.”


                        15. Back office
                        Risks are high in the back office because the volume of processing and product
                        innovation is overtaking the ability of systems to handle them. The concern was
                        particularly high among reinsurers and insurance brokers who both voted it No. 7.

                        A UK technology provider highlighted the problem. “In the world of life and
Many intermediaries     pensions distribution, many larger firms are using functionality which, through poor
‘don’t use a back       design or simple age, is limiting rather than enabling their business strategy. At the
                        smaller end of the market it is estimated that fully 30 per cent of intermediaries
office system at all’   don’t use a back office system at all.”

                        A UK insurer saw risks rising “due to the increasing complexity of products and
                        investments.” In Switzerland, the head of group risk reporting at a large reinsurer
                        said that “ever increasing information requirements are a challenge.”    A further
                        concern was the amount of regulatory change, and the extra pressure this put on
                        already overstretched systems.

                        Nonetheless, respondents tended to rank this as a receding risk. It was voted among
                        the fastest fallers, mainly because of the investment that is being made to improve
                        back office systems.


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                                               16. Political shocks and pressures
                                               Political interference in the insurance industry is growing and putting the business at
                                               risk.      Pressure from governments and politicians, tax changes, regulatory
                                               requirements, corruption and instability were all mentioned by our respondents.
                                               One said his concern was “misguided and inappropriate legislation, based on
                                               political correctness, which could remove or restrict the right to underwrite
                                               effectively.” The chief executive of a large German insurance company said that
                                               while political risk was steady in Germany “it is rising elsewhere”.

                                               The developed world is particularly
                                               worried about tax. Amendments to US          ��� ���������� ����� ���������� ����������
                                               tax laws on life and annuity products        ���� ��������� ��� ���������� ���������
                                               were cited as a major business risk. In      ���������������������������������������
                                               the UK, heavier taxation of insurance        �������������������������������������������
                                               premiums was seen as a possibility.          ��� ����� �� ������� ��� ����� �� �������
                                               New Zealand has embarked on a review         ���������
                                               of the taxation of the life business         ������������������������
                                               which one respondent expected to have        �����������������������
                                               “a very significant negative financial       ��������
                                               impact on the industry.” In Europe,
                                               EU pressure on tax havens is a concern.

                                               In North America, several respondents cited the state-sponsored Florida Hurricane
                                               Catastrophe Fund as an example of unhelpful government intrusion in the insurance
                                               market. The fund underpins the insurance market, but also regulates its prices.
                                               Canadian respondents also reported that politicians tried to influence their business.
‘Corruption,
political pressure                             In emerging markets the concern is with bad government, particularly in the area of
                                               obligatory insurance where availability and price are politically managed.
and instability’                               “Corruption, political pressure and instability” were on the risk list of the chief
                                               executive of a Russian life company. In Hungary, the key risk was “the unstable
                                               political environment”, according to the CEO of a life company.


                                               17. Pricing new risks
                                               The emergence of new risks, particularly from disease, natural catastrophe and new
                                               technology, poses a pricing challenge to insurers. If they get it wrong, losses
                                               quickly follow. A regulator saw “mispricing of risk” as one of the big Banana Skins
                                               facing the industry.

                                               In the natural catastrophe area, a rating agency analyst said insurance companies
                                               were having difficulty pricing risks “owing to rapid changes in frequency and
                                               severity of catastrophic events.” The actuary of a New Zealand property & casualty
                                               company said there was “insufficient recognition of the true cost of insurance in
                                               high risk environments, eg flood, storm.”




��������������������� ����������������������������������������������                                                               ���
�����������������������

                     Other hard-to-price areas included
                                                                 ��������
                     pandemics,           electro-magnetic
                                                                 ������� �������� ����� ����������
                     radiation, nanotechnology (see box),
                                                                 ��������������� ��� ������ ����� ������
                     genetic testing, genetically modified
                                                                 ����������������������������������������
                     foods and weight-related health
                                                                 ������� � ������ ������ ���� �������� ���
                     insurance.     A US respondent said
                                                                 ��������� ���������� ���� �������� �����
                     the industry should be particularly
                                                                 ������� ������ ���� ������� �� �����
                     concerned with risks that “cannot be
                                                                 ������������ ���������� ������� ��� ������
                     reinsured or diversified (and are
                                                                 �������� ����� ��� ������ �������� �����
                     difficult to model), eg equity risk
                                                                 ����� ���� ���������� ������������� �����
                     guarantee products.”
                                                                 ����������������������������������������
                                                                 � ��������� �� ���� ����� ����� ���� ��� ���
                     But the chief executive of a large
                                                                 ������ ����� ����������� ���������� ���
                     German insurer felt this was a low
                                                                 ��������� ���������� ������ ����������
                     risk area “because new risks are a
                                                                 �������� ��� �������� ����� ��������� ���
                     small percentage of the portfolio”.
                                                                 ������������

                     18. Terrorism
                     Though low in the rankings, this emerged as one of the fastest-rising risks (4th on the
                     risers list), not surprisingly given recent events. “Given Afghanistan, Iraq and Iran,
Terrorism takes      terrorism remains a key concern,” said one respondent. “It will continue to rise”
                     predicted another. Much of the difficulty surrounding this risk lies in predicting
many forms           what form it will take when terrorists strike. The chief financial officer of a US
                     property & casualty company said it could be “nuclear, biological, chemical,
                     radioactive.”

                     Even so, many insurers felt this risk was manageable. One insurance company
                     CEO said it had “limited insurance impact”, and another said the real risk was
                     “Paranoia!”, the irrational fear that often surrounds shadowy and unquantifiable
                     threats. It was notable that outside observers of the industry placed this risk much
                     higher (5th) than insurance practitioners (20th), suggesting that the actual incidence
                     of terrorist events may rather lower than it is perceived to be in the public mind.


                     19. Complex instruments
                     Innovation in the insurance industry is throwing up novel instruments, and with
Who’s more           them new challenges, not least the need to understand them.
savvy: insurers or
investment banks?    The chief executive of a Canadian life company said: “New products have many
                     complex and potentially very risky options embedded in them.” The chief financial
                     officer of a US life insurer offered a similar view: “The capital markets are
                     generating ever-increasingly complex financial instruments, many untested in times
                     of stress…Companies are offering very complex products, often with limited ability
                     to understand and quantify risks.”

                     Andrew Power, a partner at Deloitte consultancy, thought insurers lacked “the
                     savvy” of the investment banks who were creating many of these new instruments.
                     He asked: “Are insurers the dumb capital which investment banks feed off?” A
                     regulator said that the use of complex instruments could add to the legal risks faced
                     by insurers.

��                                           ��������������������� ����������������������������������������������
�����������������������


                                               But some respondents felt the dangers here were contained. Regulators generally
                                               put limits on the use of derivatives by insurance companies, while “treating
                                               customer fairly” rules should ensure that consumers are only offered products they
                                               can understand. The chief executive of a large European insurer said some of the
                                               complexity was driven from the bottom up.           “Consumer demand for product
                                               features in life could lead to the increased complexity of the life insurance business,”
                                               he said.


                                               20. Retail sales practices
                                               High pressure retail sales practices continue to be seen as a risk in the industry,
                                               particularly by the life sector which put them in 8th place.

Mis-selling hasn’t                             Although this was a well-flagged risk with a strong recent history in the UK,
gone away                                      respondents felt it was not truly over. “Mis-selling will hit the insurance market
                                               directly,” said the chief executive of a large London-based insurance broker.     A
                                               UK insurer even saw this risk rising because of the Financial Services Authority’s
                                               emphasis on financial institutions “treating customers fairly”, and uncertainty over
                                               precisely what this meant, increasing the scope for legal actions. Several
                                               respondents felt this issue was linked to the insurance industry’s reputational
                                               problems. (See box)

                                               But some felt that the worst was past. “The impact of regulation has reduced this
                                               risk,” said a New Zealand CEO.


                                               21. Pollution
                                               Though low down the rankings, pollution risk was high among the risers (in 3rd
                                               place) and seen as an area of growth and uncertainty. It ranked highest with
                                               property & casualty insurers (13th).       The concern was as much with sudden
                                               pollution risks as with longer-standing latent risks, such as lead.

                                               While much of the pollution risk business is now well-established, it is constantly
                                               evolving, throwing up new risks. One observer questioned whether insurers could
                                               “foresee and manage evolving pollution risks (eg nanotechnology, air pollution,
                                               genetically modified foods) as governments may not take preventative action.”

                                               Others felt this was an area of legal risk because legislative changes were constantly
                                               leading to the creation of new liabilities. One said: “Environmental liability in
                                               general may change due to changes in the legal environment, leading to cases of
                                               indemnity which would not be possible in today’s legal landscape.”


                                               22. Interest rates
What about
negative interest                              The prospect of an extended period of low interest rates is a worry because it will
                                               dampen down returns and reduce the appeal of life insurance products. The group
rates?                                         finance director of a large UK life insurer felt that “long term low interest rates”
                                               were among the greatest risks facing the sector.


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Consumerism is        �������������� ��� ��������� ��� ��� ����� ���� ��� �������� ����������� ���������� ���� �������
on the rise           �����������������������
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                    A secondary concern was that low yields would add to pressures on the sector to
                    take higher risks. A Belgian composite insurer saw low interest rates among the
                    factors encouraging insurance companies to buy investments “which are not yet
                    proven to be stable in a real financial market crisis.” Other concerns included the
                    possibility of negative interest rates, the risks in guaranteed interest rate products,
                    and exposure to defaults on the corporate bond market.

                    But as with equities, many respondents tended to play down this risk, saying that
                    insurance companies were much better at managing swings in interest rates. “Asset
                    and liability management is now widely used”, said a Swiss reinsurer.


                    23. Corporate governance
                    Some respondents felt that corporate governance was still a problem area for the
Corporate           insurance sector.     An executive from a large US broker said: “A number of
governance is off   syndicate/insurers fail to recognise this concept.”
the boil
                    Transparency is also an issue. One insurance company director said the
                    complexities of insurance reporting meant that accounts and performance
                    measurements “are not transparent to non-insiders”. An industry observer felt that
                    greater transparency in corporate governance and accounting “could have an impact


��                                             ��������������������� ����������������������������������������������
�����������������������

                                               on the types of risk that the industry is willing to assume, and on capital
                                               management.”

                                               But some comments were tinged with impatience. “There is too much focus on
                                               corporate governance to the detriment of running the insurance operations and
                                               quality underwriting,” said a New Zealand finance manager.

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                                               24. Demographic trends
                                               Changes in demographics, with people needing different types of insurance, will
                                               impact the insurance market heavily in the longer term. They will increase longevity
                                               risk for life insurers, and lead to greater claims on health insurance and care policies,
                                               and generally challenge the industry’s ability to adapt to changing demand.

                                               However it was not clear whether the industry sees this as a threat or an opportunity.
                                               Many respondents were concerned that the industry might baulk at the challenge, by
                                               failing to offer appropriate products, or by mispricing evolving risks. A respondent
                                               from a Canadian life insurer feared that change in demographics might not be
                                               reflected in actuarial data, “resulting in mispriced products”.

                                               But others saw demographic changes triggering demand for new types of insurance
                                               protection which far-sighted insurance companies could meet, for example in the
                                               areas of long-term care, “dread disease” insurance and disability income coverage.
                                               Stan Leslie, general manager of retail solutions at South Africa’s Old Mutual, said
                                               insurers must strive to “retain clients over the client life cycle, as their needs change
                                               with improvements in financial circumstance.” The group chief accountant at a
                                               large UK composite saw “a need for new consumer friendly products” to meet
                                               changing customer behaviour.

��������������������� ����������������������������������������������                                                                        ��
�����������������������

                    25. Contract wording
                    The wording of insurance contracts is becoming more of a problem as the market
                    softens and insurers allow definitions to widen.

                    “The softer the market, the broader the coverage” said a London broker.      An
Contracts are       underwriter with a large German property & casualty company saw contract
softening under     wording “broadening the scope of cover to unacceptable levels.” One broker
                    blamed it all on policy negotiators who, he said, were often “poor quality”.
pressure
                    Some respondents saw insurers taking a tougher line. Improvements in contract
                    certainty would be among the “key differentiators” in the period ahead, according to
                    the director of risk management at a UK insurer. But there was also concern that
                    the FSA’s insistence on the “treating customers fairly” rule would undermine
                    contract certainty by introducing elements of subjective judgment.     Others noted
                    that the industry would respond to pressure from brokers to standardise contracts,
                    and reinforce certainty.


                    26. Capital availability
                    The problem at this – advanced - stage of the property and casualty insurance cycle
                    is that there is too much capital in the market rather than too little, creating
                    overcapacity and sharpening competition. Many of our respondents saw margins
                    being cut to the bone. “There’s too
                                                               ����� ������� ��� ��������� ���� ����������
                    much capital chasing bulk annuity
                                                               �����������������������������������������
                    deals,” said the non-executive director
                                                               �������� ��� �������� ������������ ����
                    of a reinsurance company. “This is a
                                                               ��������� ��� ����� ���������� � ����� ���
                    soft market, so availability is not an
                                                               ����������� ���� ����� ��� ������� �����
                    issue,” said a New Zealand CEO.
                                                                 ���������� ������ ������ ���� �������� ���
                                                                 ������������� ���� ���� ��� ������������
                    Much of this extra capital comes from
                                                                 ��������������������
                    hedge funds and private equity But
Hedge funds are     will it survive the down side of the         ����������������
                                                                 ����������
stepping up with    cycle?           “At present capital
                    (traditional, retained earnings and new
new capital         such as hedge funds) is relatively plentiful,” said the chief executive of a brokerage
                    specialising in capital markets. “But new capital could disappear if we have a
                    prolonged soft market and/or a series of major losses.”

                    However, the capital surplus is not evenly spread. In several emerging markets in
                    East Europe and South East Asia, respondents said that capital was tight, usually
                    because of a lack of foreign investment.


                    27. Security of reinsurance
                    The main concern over the security of reinsurance (insurance for insurers) is the
                    replacement of traditional providers by new sources of capital, particularly hedge
                    funds and private investors who might not have the same level of commitment or
                    understanding of the market. “Who really owns reinsurance companies?” wondered
                    one respondent.

��                                          ��������������������� ����������������������������������������������
�����������������������


                                               An industry observer “the capacity and resilience of international reinsurance
                                               markets in respect of large-scale risks” could be a problem as markets become more
                                               difficult. A Swiss reinsurer said the market should be differentiated: the problem
                                               of reinsurance security lay more in the area of long tail than short tail risks because
                                               of questions about the sustainability of new capacity.


                                               28. Availability of reinsurance
                                               Though low in the Banana Skins rankings, a reduction in the availability of
                                               reinsurance is a potential risk. The number of major reinsurers in the world is small,
                                               and capital to underpin the business could be in short supply. Although this is not
                                               currently the case because of the inflow of capital from hedge funds and private
                                               investors, “some of the ‘hot’ money could disappear again”, according to a UK broker.

                                               Bertrand Wollner, chief executive of Signal Iduna Insurance in Switzerland, said
                                               that the risk profile of professional reinsurers had changed dramatically. “Insurers
                                               have increased their retentions and pushed reinsurers up the risk scale. At the same
                                               time, many insurance companies have stopped writing reinsurance and the risks are
                                               concentrated among a few players in the reinsurance markets. The risk of a big
                                               failure is increasing. I’m concerned that the insurance industry is getting less
                                               choice to place its risks. The new set-ups in Bermuda are not an alternative.”

                                               Some respondents were more sanguine. “There are new players in some lines, and
                                               balance sheets are stronger,” was one comment.


                                               29. Business continuation
                                               The ability to overcome severe business disruptions, for example from terrorism,
                                               might have been a big deal after 9/11, but not any more. Few of our respondents
                                               bothered to comment on this Banana Skin. “Most insurers have suitable business
                                               continuation plans,” said a UK insurer.


                                               30. Fraud
                                               Fraud is a problem, but the industry feels it can handle it, as its low place in the
Fraud is seen as a                             rankings suggests. The chief risk officer at a large UK life company put “financial
                                               crime” among his top Banana Skins and the head of group risk reporting at a large
very low level risk                            Swiss reinsurer said that while the frequency of fraud might be low, the
                                               “reputational impact is high”. But the chief executive of a large German insurance
                                               company thought this risk was falling. ”Awareness has increased,” he said.
                                               Several insurers made a point of saying that their staff and agents were honest.

                                               But looking ahead, there was concern among some respondents about new types of
                                               fraud, particularly as a result of new technology. The chief financial officer of a
                                               large UK life insurer expected fraud to become “more sophisticated” with a greater
                                               risk of people hacking into databases. A supplier of technology to the industry also
                                               pointed out that “the push towards operational simplicity is creating new fraud
                                               risks.” There was a concern that the growing “claims culture” among the insured
                                               would encourage fraudulent claims.

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�����������������������

                    31. Merger mania
                    Although this was low in the rankings, merger mania was seen as one of the faster
Further             rising risks. Further consolidation in the insurance industry is expected, raising the
consolidation is    spectre of mergers that increase concentration in the business, or don’t work out.
expected            A UK consultant saw “a continued focus on consolidating balance sheets and
                    outsourcing of business processes.” In Switzerland, a reinsurer said that consolidation
                    would result in “concentration of risk for reinsureds and strain on balance sheets.”

                    Several respondents expected to see
                                                                   ���� ������ ��� �������� ���������
                    consolidation among broking houses.
                                                                   ��������������� ���� ������ �������
                    The group strategist of a major
                                                                   �������������������������������������
                    Australian insurer was concerned that
                                                                   ����������������
                    this would lead to “increased
                                                                   ������������������������
                    commoditisation” of the business and a
                                                                   �����������������
                    shift towards standard wordings and
                    aggregation price comparators.

                    Some respondents noted that pressure to merge was very strong, and that management
                    would need self-discipline to resist it. But one insurance chief executive felt that the
                    danger of bad deals was small. “The capital market should control that,” he said.


                    32. Too little regulation
                    The problem with regulation is too much rather than too little. Nonetheless,
                    regulation could be inadequate in two respects: international coordination, and in
                    emerging markets.
More regulation
needed in the       There was “too much in Europe and too little in the Third World,” said the finance
                    director of a UK insurer. Respondents from countries such as Russia and Thailand
Third World         said regulation in their countries was inadequate, though they were referring to the
                    quality rather than the quantity. A Swiss reinsurer complained of “the burden of
                    inconsistent national requirements,” though he added: “But too little regulation
                    endangers the reputation of whole industry.”

                    A regulator said that there was too little regulation of the reinsurance market.
                    “Many of the largest reinsurance companies are located in jurisdictions that either
                    deliberately have minimal regulatory oversight or, if they do, they lack the
                    regulatory muscle. If things get really bad they also lack the financial muscle to sort
                    things out. A major reinsurer in a G10 country may well get bailed out if the worst
                    comes to the worst. Bermuda can’t afford it.”


                    33. Asbestos
                    Once the terror of the insurance world, asbestos risk has dropped to the bottom of
                    the list. Time has done its work, and exposures are down, though one respondent
                    cautioned: “Stable, but always a risk.”




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                                               Preparedness
                                               We asked the question: “How well prepared do you think your own and other
                                               institutions are to handle the risks you have identified?” Respondents could
                                               answer: poorly, mixed or well.




                                                                                         Poorly
                                                                         Well             3%
                                                                         21%

  I’m OK, but what
  about them?




                                                                                                   Mixed
                                                                                                   76%




                                               More than three quarters of the respondents replied “mixed”, usually because they
                                               differentiated between their own preparedness, or those of the group to which they
                                               felt they belonged (eg the home team) which was seen to be good, and that of
                                               another group (eg new entrants), which was less good. But the “mixed” responses
                                               often had a positive tone. One respondent replied “mixed but improving”.

                                               Just over a fifth answered “well”. The most frequent reasons were that the insurance
                                               industry was well-placed to manage the insurance cycle and the vagaries of the
                                               financial markets.      The industry also believed that it would “see off” new
                                               competition. The group finance director of a large UK life insurer said: “Generally,
                                               I am more confident of the outlook for the life industry than at any time in the last
                                               seven years.”

                                               Only three per cent answered “poorly”. The reasons included poor adaptability to
                                               more competitive environment, staffing problems, and a complacent attitude
                                               towards cycle management.




��������������������� ����������������������������������������������                                                             ��
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Sponsorship and support...
The CSFI receives support from many public and private institutions, and that support takes different forms. In 2006
and through February 2007, we received financial support from:

                 Accenture                                       Linklaters
                 Barclays Group                                  Morgan Stanley International
                 Citigroup                                       PricewaterhouseCoopers
                 JPMorgan Chase                                  UBS


                 Abbey                                           HM Treasury
                 Aberdeen Asset Management                       HSBC Holdings plc
                 Alliance & Leicester                            International Capital Market Association
                 Aon                                             KPMG
                 AVIVA plc                                       Law Debenture Corporation plc
                 AXA                                             Lloyd’s of London
                 Bank of England                                 Lloyds TSB
                 BT Global                                       LogicaCMG
                 City of London                                  London Stock Exchange
                 CRESTCo/Euroclear                               Man Group plc
                 Deloitte                                        McKinsey & Co
                 Deutsche Bank                                   Monitise
                 DTI                                             Moody’s Investors Service Ltd
                 Ernst & Young                                   Nomura Institute of Capital Markets Research
                 Euronext.liffe                                  PA Consulting
                 Eversheds                                       Prudential plc
                 Fidelity Investments                            Record Currency Management
                 Finance and Leasing Association                 Reuters
                 Financial Services Authority                    Royal Bank of Scotland
                 Fitch Ratings                                   Standard & Poor’s
                 Futures & Options Association                   Swiss Re
                 Halifax plc                                     Z/Yen


                 Association of Corporate Treasurers             International Financial Services, London
                 Bank of Italy                                   Lombard Street Research
                 Banking Code Standards Board                    NM Rothschild & Sons
                 Brigade Electronics                             Preroy AG
                 Chown Dewhurst LLP                              The Housing Finance Corporation
                 Clifford Chance NY                              The Share Centre
                 DCE Consultants                                 Threadneedle Investments
                 Financial Times                                 Watson Wyatt
                 FSA Solutions                                   Winterflood Securities Limited




In addition, the Centre and the NY CSFI has received special purpose support from, among others: ABC International
Bank, Arbuthnot Banking Group, Clifford Chance, Close Brothers Group plc, EFG Private Bank Limited, GISE AG,
Henderson Global Investors, International Capital Market Association, ifs School of Finance, JPMorgan Chase, Morgan
Stanley International, National Australia Group, Resolution, Mr. Peter Roth, Soifer Consulting, TaylorWessing,
Winterflood Securities, World Bank and the G30.




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