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Crime, regulation and technology are top of the mind for insurance company Chief Risk Officers


Published: 11 Jan 2022

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ICAEW’s Zsuzsanna Schiff looks at the results of the Centre for the Study of Financial Innovation (CSFI) and PwC’s 2021 Insurance Banana Skins.

Contrary to expectation, Chief Risk Officers (CROs) painted a more positive picture in 2021 compared to the last Banana Skins survey in 2019. They gave a more upbeat view of the industry’s ability to manage the challenges it faces, with the COVID 19 pandemic not expected to have a lasting effect. COVID 19 was most frequently mentioned as an operational risk, as staff took to working from home, where security could be a greater issue. This matches the view the sector had at the start of the pandemic. Remote working conditions were set up quickly, as insurers adapted more rapidly than other sectors.

COVID 19 also features as an underwriting risk in the form of disputed business interruption and medical care claims. This could have consequences for the future wording of policies, and pricing. Another concern is potential pressure from regulators to settle borderline claims.

In other “Cs” Cybercrime has become the top concern with climate change also featuring high on the agenda. The uncertain outlook on interest rates, as well as the lack of human talent needed for the industry’s transformation are on top of CROs mind.

The weight attached to these concerns varies by sector. The life sector’s focus is around the longer-term effects of regulation, interest rates and technology while the list is topped by climate change and crime for the non-life sector. This reflects the nature of both businesses - annuities, investment performance vs catastrophes and cybercrime. While there is variation between geographical segments the top risks are the same around the world.

The top five risks

1. Crime 

Crime has topped the chart for the first time. Insurers are concerned that this could be a risk in multiple ways, as the industry is increasingly dependent on data, IT, cloud and third-party technology services. Tech is interconnected and any attack could start a chain reaction causing multiple disruptions. These risks are also very difficult to model and it is also likely that underwriters would underestimate the potential costs of cybercrime. Insurers and their clients would also have different expectations of what is covered and what is not, increasing the likelihood of litigation and reputation damage.

2. Regulation

Changing regulation is another major item on CROs’ lists. Society, political and regulatory bodies are increasingly wondering about “who is responsible?” The result is increasing regulation and increasing attention on compliance, all of which place a cost burden on insurers. Regulation is also feared to stifle innovation and adversely affect customer experience too.

3. Technology

Keeping up with technology is an “arms race”. Technology can lower expense ratios, and those that lag in adoption will struggle. However, the cost of tech modernisation is a major concern and the difficulties of adapting existing business processes are significant. However, new entrants to the industry (insurtechs) may move too fast and without proper safeguards.

4. Climate change

The risk from climate change is seen by insurers as growing, urgent and present. The underwriting risk is increased due to lack of historical precedent and requires the continuous recalibration of pricing and capital allocation strategies. The wider implications are impossible to predict in part due to the non-linear acceleration of climate change. The life side of the industry is not protected either – the slow burn will impact asset values and investment portfolios.

5. Interest rates

The industry is concerned about poor investment returns (especially for those with guaranteed return products), but at the same time rising inflation would put significant pressure on profits and have a sizeable impact on capital requirements. Continuation of low interest rates could force the industry to seek more risky targets and eventually make products more expensive and unattractive to customers.

Other areas to watch

Attracting and retaining human talent is another increasingly significant risk. The sector is not seen to be doing enough to shed the perception that insurance is boring and outdated, especially to young people. The challenges are amplified by competitive labour markets and sharpened by COVID 19 restrictions.

Elsewhere in the survey risks coalesce around management of change. Some of these are specific to the industry, like the potential upheaval from changing business models (due to automation and digitalisation) and the threat from new entrants to the marketplace exacerbated by competition from disruptors collaborating with incumbents. Others are broader, macroeconomic risks, geopolitical tensions and political risk arising from potential government intervention (for example the German “pension politics”).

The list doesn’t end there, with other risks around cost reduction, security (working from home has increased operational risk), reputation, pricing and mispricing of products. General social pressures, customer expectations from products are followed by the risks arising from running a complex business model, like insurance: adapting the business to the constantly changing environment, capital availability with ever stricter regulatory requirements and credit risk itself circling back to risk assessment.

The list closes with the evergreen importance and risk attached to quality of management, business conduct and corporate governance. These are not specific to insurance but are getting more and more attention especially in financial services.