How is the insurance industry faring?

• Author: Porrino, Peter
• Position: INSURANCE

In its Second Annual Business Risk Report--Insurance 2009, Ernst & Young, with Oxford Analytica, interviewed industry analysts worldwide to identify emerging trends and uncertainties driving the fortunes of the global insurance sector over the next five years. The study identified the 10 most important industry risks, all of which have been exacerbated by the economic downturn.

1. Financial Market Crisis

   The financial crisis has battered the financial-services industry. Many insurance companies have suffered a significant depletion of capital. The consequences are likely to shape the industry for the next 10 years, according to analysts interviewed. Major forms of change involve products, regulation, investment strategies and capital requirements.

   Insurers are taking extensive measures to strengthen their risk management programs, while examining the internal and external factors around the financial crisis, to mitigate such an occurrence in the future.

   In this volatile equity market, life insurers have experienced a sales decline in equity-based products as consumers shift from variable products to fixed products. Nearly all of the top variable annuity issuers have announced product redesigns, price increases or other product rollbacks to re-balance company risk appetite with consumer benefits.

2. Model Risk

   Economic conditions have directly impacted models and offer a chilling reminder that tail risk is still a huge unknown. Some insurance companies were unprepared for the depth of financial shocks because they failed to recognize the short comings of their models and to adequately capture the nature of underlying risks.

   The most dramatic failures were among financial products related primarily to credit default swaps--although some life annuity guarantees have hurt market participants. Nevertheless, the failure of the models used by financial institutions and regulatory authorities to identify and quantify the risk associated with these products is likely to result in greater scrutiny of insurance models.

   One significant shortcoming of many existing models is the inability to incorporate correlations across different risks and operations.

3. Regulatory Intervention

   The regulatory landscape is evolving at a rapid pace and companies are working to adapt and align their strategy with the changing environment. While Europeans focus on bringing the updated set of regulatory requirements known as Solvency II into their operating environment, the...