Insurers & society 2013

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Despite surviving the global financial crisis with their reputations intact, insurance companies still have not enjoyed an easy ride during the testing economic conditions since 2008.

Ongoing macroeconomic uncertainty alongside proposed tough new regulatory regimes, natural disasters and extreme weather conditions, in addition to a combination of rising longevity and low investment returns, have all served to create very real challenges for the insurance industry.

In response, insurers are rethinking business processes and product ranges in order to remain competitive under new risk-based capital regimes, to meet the evolving needs of their customer base and to continue to play a beneficial role in the economy and broader society. However, insurers are finding it difficult to re-think too much of their strategy when much regulation, such as Solvency, II is still very much a moving target.

The Economist Intelligence Unit, on behalf of BNY Mellon, surveyed 332 companies around the world including insurers, reinsurers, wealth managers and independent financial advisers to find out what immediate and long-term challenges the insurance industry faces and how insurers are responding, as well as to explore ways in which the industry will develop in the future. The survey results were supplemented with in-depth interviews with a range of experts.

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Insurers & society 2013

  1. 1. A report from the Economist Intelligence Unit.BNY Mellon cover.indd 1 07/02/2013 11:05:25
  2. 2. Insurers and society Challenges and opportunities in the period to 2030 Preface Insurers and Society is an Economist Intelligence Unit report, sponsored by BNY Mellon. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. The author was Gill Wadsworth and the editor was Monica Woodley. About the research In December 2012 the Economist Intelligence Unit surveyed  John Godfrey, director of corporate communications at Legal 332 companies around the world. Respondents comprise 164 & General insurers from life, non-life and reinsurance companies and 168  Mitch Hopkinson, UK managing partner at deVere Group intermediaries, including financial advisers, wealth managers and private banks. Respondents were grouped into three  Olav Jones, deputy director-general at Insurance Europe regions: North America with 100 individuals; Europe with 115;  Carlos Montalvo, executive director at the European and Asia with 117. Insurance and Occupational Pensions Authority The survey data is augmented with eight in-depth interviews  Takashi Okuma, general manager in the international and our thanks are due to: department of the General Insurance Association of Japan  Steven Brostoff, senior spokesman at the American Council  Martin Senn, CEO of Zurich Insurance Group of Life Insurers  Jim Donelon, president of the National Association of Insurance Commissioners and Louisiana Insurance Commissioner1 © The Economist Intelligence Unit Limited 2013
  3. 3. Insurers and society Challenges and opportunities in the period to 2030 Contents About the research 1 Executive summary 3 Introduction 5 Key challenges 6 An insurer’s role in society 8 Regulatory impact 11 Staying relevant on the route to 2030 14 Confronting climate change 16 Evolving to meet changing needs 19 Conclusion 25 Appendix: Survey results 262 © The Economist Intelligence Unit Limited 2013
  4. 4. Insurers and society Challenges and opportunities in the period to 2030 Executive summary Despite surviving the global financial crisis with ways in which the industry will develop in the their reputations intact, insurance companies future. The survey results were supplemented still have not enjoyed an easy ride during the with in-depth interviews with a range of experts. testing economic conditions since 2008. The key findings of the research are: Ongoing macroeconomic uncertainty alongside proposed tough new regulatory regimes, natural  Macroeconomic uncertainty, regulation and disasters and extreme weather conditions, in risk of contagion are the biggest challenges addition to a combination of rising longevity and facing insurers in the long term low investment returns, have all served to create Macroeconomic uncertainty is seen by survey very real challenges for the insurance industry. respondents as the main challenge facing both life and non-life insurers (36% and 39% In response, insurers are rethinking business respectively) in the period to 2030. Regulation is processes and product ranges in order to the second-biggest challenge facing life insurers remain competitive under new risk-based (34%), while risk of contagion from other parts capital regimes, to meet the evolving needs of the financial system is a major concern for non- of their customer base and to continue to play life insurers and reinsurers (33%). a beneficial role in the economy and broader society. However, insurers are finding it difficult  Regulators and policymakers should consider to re-think too much of their strategy when much socioeconomic goals regulation, such as Solvency II, is still very much Almost fourth-fifths (79%) of respondents agree a moving target. that regulators should balance concerns for policyholder protection with other socioeconomic The Economist Intelligence Unit, on behalf of objectives, such as promoting savings, while BNY Mellon, surveyed 332 companies around almost one-half (48%) believe that policymakers the world including insurers, reinsurers, wealth should incorporate socioeconomic goals into managers and independent financial advisers regulators’ remits. Over one-half (54%) of those to find out what immediate and long-term surveyed believe that regulators and legislators challenges the insurance industry faces and how are focusing on near-term stability at the insurers are responding, as well as to explore expense of longer-term economic growth.3 © The Economist Intelligence Unit Limited 2013
  5. 5. Insurers and society Challenges and opportunities in the period to 2030  Insurers are not doing enough to meet regulation reduces insurers’ ability to shift risk societal responsibilities away from households and transform financial A strong majority (80%) of respondents agree market risk into reliable streams of retirement that insurers have a duty to contribute positively income and other benefits—one of the industry’s to society, with all regions in equal agreement, core functions. The same proportion believe that yet only 55% agree that insurers are fulfilling the burden will fall on governments to make up that role. Overall, intermediaries are slightly for individuals’ private pension shortfalls, but less convinced that insurers are contributing many (45%) worry that they will not be able to (53%, compared with 56% of insurers), with the afford to do so. Limiting the insurance industry’s biggest discrepancy between the two groups ability to transform risk will have serious seen in North America, where 64% of insurers ramifications for future generations and for the believe that they are meeting their societal industry itself. responsibilities, while just 36% of intermediaries  Insurers need help to support developing agree. countries and emerging economies  Regulation is hampering insurers’ ability to Nearly one-half (45%) of respondents said that meet consumers’ needs supranational organisations should work with Almost three-quarters (70%) of respondents developing countries to inform policymakers agree that individuals will have inadequate better of the value of catastrophe and other private savings and pensions as a long-term forms of insurance as a top priority. Over one-half consequence of new regulation, while just over worry that without adequate data, reinsurers may one-half (51%) believe that current regulatory withdraw from providing catastrophe reinsurance and accounting rules encourage insurers to in emerging markets (55%), and that if reinsurers move away from guaranteed products, leaving pull back from these markets, individuals and individuals with the burden of investment risk. corporates will be forced to go underinsured In response to changes affecting the industry, (52%). Respondents (57%) also fear that the life insurers are offering fewer products absence of reinsurance will slow investment (49%), limiting guarantees (40%) and raising into emerging economies, which in turn will prices (35%). slow these countries’ economic growth—a major concern, given the importance of emerging  Insurers are needed more than ever but are economies to pulling the global economy out at risk of irrelevance of stagnation. Over one-half of respondents (54%) believe that4 © The Economist Intelligence Unit Limited 2013
  6. 6. Insurers and society Challenges and opportunities in the period to 2030 Introduction Insurers around the world face a succession However, there are some contradictions between of challenges as they begin 2013. Ongoing what the industry believes that it should do best economic uncertainty alongside the significant to manage current challenges and the steps that costs of insuring against extreme weather events, it is actually taking. Equally, there is the need for shifting demographics and looming regulatory more collaboration and communication between changes are converging to put significant insurers, supranational organisations and pressure on the insurance industry. international and domestic regulators to help to manage immediate and long-term challenges. At the same time, individuals and institutions This includes marketing the benefits of insurance are struggling with those same economic to consumers so that they recognise their own uncertainties and environmental threats, and are protection needs, as well as the insurance in greater need of the protection available from industry’s contribution to wider societal goals insurers than ever before. such as economic growth. In order to meet this consumer need while In this report we explore the main challenges adhering to stringent regulatory requirements identified by the insurance industry and the ways and maintaining their place as vital, positive in which it has responded, and examine what else contributors to capital markets and to society at can be done to help insurers to continue to drive large, insurers recognise the need to adapt and positive economic behaviour while protecting evolve their organisations. society from risk.5 © The Economist Intelligence Unit Limited 2013
  7. 7. Insurers and society Challenges and opportunities in the period to 2030 1 Key challenges The top challenges facing the life insurance based capital demands in the shape of Solvency sector in the years to 2030 are macroeconomic II, the EU directive. uncertainty, regulation, rising longevity and low investment returns. On the whole, insurers are supportive of Solvency II, which is designed to improve risk When looking across the regions, the biggest management, transparency and reporting issue for European life insurers is regulation. and to align better capital requirements with One-half of respondents located in Europe underlying risks, with a view to providing more feel that regulation is a major threat to their security to policyholders. However, a number of organisations, which reflects the impact of risk- concerns remain. Martin Senn, CEO of global insurer Zurich Chart 1 Insurance Group, says: “Insurers must be well What do you believe are the factors most likely to affect the life capitalised but regulators must avoid setting insurance industry in the years to 2030? overly conservative and detailed requirements. (% respondents) This could lead to an inefficient use of capital and ultimately more expensive prices for our Macroeconomic uncertainty and financial market volatility 36% customers. Solvency II must not become a bureaucratic and costly compliance exercise.” Regulation 34% For some insurers, the preparations for Solvency Increased longevity 33% II are already costing significant sums and the continued uncertainty over the final shape of Low investment returns 33% the regulation and its implementation date are Risk of contagion from other problematic. And, although the regulation will parts of the financial system 31% create a more level playing field across Europe, the shift from current regulations—and hence the Climate change 30% implications—are significantly bigger for some Taxation 26% jurisdictions than others. John Godfrey, director of corporate Increased competition 18% communications at UK-based insurer Legal & Fundamental changes to General (L&G), says: “[The] lack of regulatory the structure of society 13% certainty and frequent changes force insurers Role of government in insurance provision 8% to invest heavily in projects like Solvency II. Several billion has been invested already, with Note. Figures do not add to 100% as respondents could select up to three factors. no ultimate clarity emerging. The costs are Source: Economist Intelligence Unit. ultimately borne by consumers.”6 © The Economist Intelligence Unit Limited 2013
  8. 8. Insurers and society Challenges and opportunities in the period to 2030 Chart 2 For non-life insurers and reinsurers, respondents also pointed to macroeconomic uncertainty as What do you believe are the factors most likely to affect the the biggest risk. non-life/reinsurance industry in the years to 2030? (% respondents) Zurich’s Mr Senn says: “This uncertainty— particularly in the low interest rate environment, Macroeconomic uncertainty and financial market volatility 39% the risk of future inflation and the turbulences in the euro zone—has the potential to influence our Risk of contagion from other parts of the financial system 33% overall strategy and the types of solutions we develop for our customers.” Increased competition 31% The insurance industry must also battle with the Regulation 31% reputational fallout from the 2008/09 global financial crisis. Although their reputations were Climate change 27% relatively untarnished in the wake of the credit crunch, insurers’ proximity to and relations Low investment returns 26% with the rest of the financial sector create some concern about “guilt by association”. Taxation 25% Consequently, almost three-quarters (73%) of Fundamental changes to the structure of society 19% respondents believe that insurance is at risk of contagion from problems in other parts of the Increased longevity 17% financial system. Role of government in Further, the damage done to the financial insurance provision 12% markets following the economic meltdown from Note. Figures do not add to 100% as respondents could select up to three factors. 2008 has led to a series of market shocks which Source: Economist Intelligence Unit. have, in turn, damaged insurers’ own investments and their ability to generate returns. Reflecting this, nearly three-quarters of respondents say And Solvency II is not the only piece of that the insurance industry is still at risk of legislation on insurers’ regulatory agenda. Olav contagion, despite risk-based regulation. Jones, deputy director-general of a European insurance trade body, Insurance Europe, says Mitch Hopkinson, UK managing partner at a that companies are tackling numerous pieces global independent financial adviser, deVere of legislation simultaneously. The European Group, says that insurers could have done more Commission and EIOPA have an ambitious to make clear their lack of culpability during regulatory programme,” he says. “As well the crisis. “Insurers have not necessarily as Solvency II there is the work to identify done enough to say ‘we haven’t created this institutions that could potentially pose systemic issue’,” he notes. “They have let life pass them risk to the economy; the EC upcoming Green by rather than stepping up and saying they paper on long-term investments; the review of weren’t to blame and they do have an important the EU IORP Directive and more.” role to play.”7 © The Economist Intelligence Unit Limited 2013
  9. 9. Insurers and society Challenges and opportunities in the period to 2030 2 An insurer’s role in society Insurance was born out of the need to help Insurers also drive societal benefit through individuals and institutions to protect themselves contributions to economic growth. Statistics from risk, and survey respondents still consider from the UK’s insurance trade body, the this to be the most important way in which the Association of British Insurers (ABI), show that industry contributes to society. in 2011 British insurers managed investments amounting to 26% of the UK’s total net worth, According to Insurance Europe’s Mr Jones: employed 290,000 people and paid £10.4bn “Protecting people from risks and enabling (US$16.6bn) in taxes. them to invest and save for their future are vital parts of the function of insurance to society. If Insurers are also major investors both at home someone is flooded and they are not insured then and abroad, which drives global economic the impact is devastating, but if they are insured growth. In the US, for example, the insurance it can be emotionally painful and inconvenient industry is the biggest investor in US corporate but it becomes manageable.” bonds, which the American Council of Life Insurers (ACLI) describes as “the seed corn of Chart 3 business growth and job creation”. What are the most important roles the insurance industry plays in society? As large publicly listed companies, insurers also (% respondents) have a role in driving financial gain for their shareholders, and 60% of survey respondents To allow institutions to protect agree that it is the duty of insurers to deliver themselves from risk 57% returns to their investors. North American To allow individuals to protect themselves from risk 48% insurers felt most beholden to shareholders, with 66% believing that it is their duty to deliver To provide individuals with savings and pension products 36% value, while 61% of Asian insurers and 56% of To act responsibly as providers of debt European insurers felt the same. and equity capital to corporations 34% To act responsibly in their Although satisfying shareholders and dealings with policyholders 33% policyholders is clearly the highest priority To act responsibly as for insurers, they must also meet other shareholders of corporations 30% important responsibilities in their role as major To comply with regulations investors; more than one-quarter (30%) of set by government 18% survey respondents say that insurers should act To generate tax revenues for central government 8% responsibly as shareholders of corporations, while just over one-third (34%) say that it is Note. Figures do not add to 100% as respondents could select more then one option. important to act responsibly as providers of debt Source: Economist Intelligence Unit. and equity capital to corporations.8 © The Economist Intelligence Unit Limited 2013
  10. 10. Insurers and society Challenges and opportunities in the period to 2030 Chart ? 4 Do you agree or disagree with the following statements? (% respondents) Agree Neither agree nor disagree Disagree It is the duty of insurers to deliver returns to shareholders 66% 26% 56% 32% 8% 12% North America Europe 61% 25% 60% 29% 14% 11% Asia Overall It is the duty of insurers to provide financial stability to policy holders/customers 54% 66% 26% 38% 8% 8% North American insurers European insurers 58% 28% 14% Asian insurers Source: Economist Intelligence Unit. Over one-half (57%) of respondents agree that intermediaries marginally more likely to agree it is the duty of insurers to provide financial than insurers (81% versus 78%). stability to policyholders and customers. Jim Donelon, president of the National Some 80% of all respondents agree that insurers Association of Insurance Commissioners (NAIC) have a duty to contribute positively to society, and Louisiana Insurance Commissioner, says: with all regions in equal agreement, and with “The entire business model is about helping9 © The Economist Intelligence Unit Limited 2013
  11. 11. Insurers and society Challenges and opportunities in the period to 2030 Chart 5 Do you agree or disagree with the following statement? It is the duty of insurers to contribute positively to society (% respondents) Agree Neither agree nor disagree Disagree 80% 78% 81% 14% 18% 11% 6% 4% 8% Overall Insurers Intermediaries Source: Economist Intelligence Unit. society cope with the risks faced every day. Meanwhile, Mr Hopkinson of deVere Group says: Insurers are often cited for being good corporate “Insurers could do more to reinvent themselves citizens. In the aftermath of the recent and create more presentable and more Superstorm Sandy in the north-eastern part of innovative products.” the US, many insurers contributed substantial funds in support of first responder and charitable Chart 6 organisations serving the people displaced from homes and businesses.” Do you agree or disagree with the following statements? However, just 55% of respondents believe that (% respondents) insurers are contributing positively to society, Agree Neither agree/ Disagree nor disagree which is a notable fall from last year’s survey of European insurers, which found that 69% of those surveyed agreed that insurers made a positive contribution. In addition, more than two-fifths (43%) agree that insurers need 55% 39% to go no further in contributing to society 6% than complying with laws and regulations, The insurance industry representing only a marginal increase compared generally contributes with last year’s European survey, in which 41% positively to society were in agreement. L&G’s Mr Godfrey suggests that insurers could 34% better help society and consumers by allowing marginalised groups access to insurance 43% products. “More could be done by widening 23% access to insurance products for traditionally It is the duty of insurers to comply hard-to-reach groups, for example contents with all applicable laws and regulations, insurance for occupants of social housing,” he but beyond that, they have no duty to says. “Insurance should be an ‘everyman product’ contribute positively to society and this has implications for product design and Source: Economist Intelligence Unit. distribution/access.”10 © The Economist Intelligence Unit Limited 2013
  12. 12. Insurers and society Challenges and opportunities in the period to 2030 3 Regulatory impact Insurers recognise the importance of sound while 79% of those surveyed agree that regulation in driving good practice and regulation will renew consumer confidence in the promoting consumer confidence, yet the survey insurance industry, which will, in turn, increase reveals a number of misgivings about the way sales of insurance products. that regulation is developing. However, 70% of all respondents believe that On the positive side, nearly one-half (46%) of individuals will have inadequate private savings respondents believe that risk-based capital and pensions as a long-term consequence of systems are making policyholders more secure, new regulation, while more than one-half (51%) Chart 7 Do you agree or disagree with the following statements? (% respondents) Agree Neither agree nor disagree Disagree 39% 37% 73% 17% 46% 44% 15% 19% 10% Despite regulation, insurers are still New regulation, specifically the Risk-based capital regimes will force at risk of contagion from problems in move to risk-based capital regimes, insurers out of debt and equity capital other parts of the financial system has made policyholders more secure markets and into holdings of sovereign debt and cash 36% 40% 51% 45% 13% 15% Risk-based capital regimes make it Regulation will ultimately drive insurers more likely that life or pension to less controlled jurisdictions as products will actually deliver what customers will not meet the associated costs retail customers want, such as adequate pension or annuity streams Source: Economist Intelligence Unit.11 © The Economist Intelligence Unit Limited 2013
  13. 13. Insurers and society Challenges and opportunities in the period to 2030 Chart 8 New regulation is designed to make policyholders more secure and confident, but insurers and Do you agree or disagree with the intermediaries see the negative effects—that following statements? (% respondents) regulation will transfer risk to consumers and limit products—which consumers, perhaps, Agree Neither agree/ Disagree nor disagree do not. Mr Godfrey says: “Having appropriate, clear, 38% proportionate and stable regulation—both 43% prudential and conduct—can help consumer confidence and encourage consumers to protect 20% themselves. Sadly, much regulation falls short of Risk is effectively being transferred these ideals. One area where regulation can help from insurers to individuals and is in supporting the insurers’ role as long-term the state investors, actively engaged in supporting the corporate governance agenda.” 33% Further concern lies in the application of 54% regulation designed for other financial institutions, such as banks, to the insurance 14% industry. Some insurance companies believe that Shifting risks to households attempting to adhere to legislation that does not diminishes the extent to which the work with the nuances of insurance may be to the financial sector transforms financial detriment of consumers in the long term. market risk into reliable retirement income and other benefits Zurich’s Mr Senn says: “Regulation must be Source: Economist Intelligence Unit. tailored to the specific features of the insurance business model. It is crucial that regulation does not hinder insurers in fulfilling their agree that the current regulatory and accounting economic role. For example, if rules designed rules encourage insurers to move away from for banks to address systemic risk were applied guaranteed products, leaving individuals with the to insurers, this would reduce the ability of burden of investment risk. insurers to provide a range of solutions to Further, nearly two-fifths (39%) of all insurers customers, including large and small corporates and nearly one-half (46%) of intermediaries and individuals. The amount of capital insurers agree that risk is being transferred from insurers hold should be determined by the nature of the to individuals and the state, and more than underlying risks.” one-half (54%) of all respondents agree that this shifting risk diminishes the extent to The regulators, however, are keen to iterate which the financial sector transforms financial that risk-based capital regimes force insurers market risk into reliable retirement income and to understand better the risks facing their other benefits. (Although it is possible that the organisations and, consequently, better introduction of risk-based capital regimes has manage them. simply turned implicit protection into explicit protection, albeit accompanied by greater costs Carlos Montalvo, executive director at the and reduced flexibility.) European Insurance and Occupational Pensions12 © The Economist Intelligence Unit Limited 2013
  14. 14. Insurers and society Challenges and opportunities in the period to 2030 Authority (EIOPA), which is overseeing the Steven Brostoff, senior spokesman at the ACLI, implementation of Solvency II, says: “The says: “Regulation is still in flux. [We] have objective of Solvency II is to encourage argued repeatedly for capital rules that reflect companies to better understand their risks. This [the] business model of life insurers, rather understanding will allow insurers to properly than the business model of banks. We are also identify, price and mitigate the risks they face concerned that Dodd-Frank [Wall Street Reform and, therefore, make better decisions. This is and Consumer Protection Act] regulations under positive to consumers.” development at federal regulatory agencies respect the statutory language granting In the US, too, insurers are concerned about insurance an exception to the Volcker Rule [which whether regulation is providing greater bans proprietary trading] and other measures.” security to consumers. Just 38% of North American insurers and 36% of the region’s However, US regulators counter that insurers intermediaries agree that new regulation has “know and are comfortable with the status quo”, made policyholders more secure. Further, more and are unsettled by change, particularly where than one-half (58%) of North American insurers that change is uncertain. As a consequence, agree that new insurance regulations will starve the NAIC’s Mr Donelon says that US regulators corporates of debt and equity capital, rendering “have a lot of work to do to implement them unable to drive an economic recovery. necessary changes.”13 © The Economist Intelligence Unit Limited 2013
  15. 15. Insurers and society Challenges and opportunities in the period to 2030 4 Staying relevant on the route to 2030 Given the high level of expectation that new regulation will Chart 10 lead to a weakening in insurers’ ability to provide adequate pension savings, more than one-half (54%) of respondents Do you agree or disagree with the following statement? believe that it will fall to governments to make up for Nation states will not be able to afford to make up individuals’ private pension shortfalls. At the same time, any private-sector pension shortfalls 45% of respondents agree that governments will not be able (% respondents) to afford to make up these shortfalls, and this is a greater Agree Neither agree nor disagree Disagree concern in Asia-Pacific, where one-half of respondents agree, compared with 44% in Europe and 40% in North America. This suggests that insurers believe that their core 49% competence—turning financial risk into reliable income 40% streams—is being undermined by regulation, given that under 11% proposed rules they are less able to take on that role. North America Such a situation creates a vicious circle in which individuals underinvest for their future and are forced to rely on the government. In turn, governments cannot afford to bear the burden and are driven to the brink of bankruptcy, which 33% devalues their sovereign debt. This then undermines proposed 50% solvency regulation, which encourages insurers to hold 17% government bonds as these are considered “risk free”. Asia Chart 9 Do you agree or disagree with the following statement? 42% It will fall to individual nation states to make up for individuals private pension shortfalls 44% (% respondents) 14% Europe Agree Neither agree/ Disagree nor disagree 41% 30% 45% 54% 14% 17% Overall Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.14 © The Economist Intelligence Unit Limited 2013
  16. 16. Insurers and society Challenges and opportunities in the period to 2030 The ultimate outcome of this unintended regulatory Chart 12 consequence is the very real possibility that insurers will struggle to support future generations. What should be the top priority for national policymakers in shaping the role of the insurance To help to manage some of these regulatory misgivings, there industry? (% respondents) are strong levels of agreement among survey respondents that regulators should balance their concerns for policyholder protection with other socioeconomic objectives, such as 38% Require individuals and businesses promoting savings. More than three-quarters (78%) of to insure their property (compulsion) respondents agree, while just 8% disagree. However, there was less conviction that policymakers should incorporate socioeconomic goals into regulators’ remits; 48% agreed Do more to highlight the role insurers versus 13% who disagreed. Do insurers distrust politicians’ can play in preparing for the ability to get this right? Or believe that although regulators 32% demographic time bomb (eg, through the provision of savings products should take a balanced view, a requirement to assess social and/or health insurance) impact should not be set in stone? Broaden regulators’ remits to include Mr Donelon of the NAIC says: “While regulators in the US are 19% the impact of regulation on broader occasionally accused of social engineering, they are more socioeconomic goals Require individuals to have some 12% form of retirement provision (compulsion) Source: Economist Intelligence Unit. Chart 11 Do you agree or disagree with the following statements? (% respondents) concerned with their primary regulatory mission to make sure that insurers have sufficient capital at their disposal to Agree Neither agree/ Disagree nor disagree honour the promises they have made to their policyholders and claimants.” 78% The ACLI’s Mr Brostoff adds: “It is not the role of regulation to drive a social agenda. The direction of society is determined 14% by voluntary interactions among a free people and by policy 8% choices enacted by the elected representatives of the people. Regulation should implement the public policy choices make Regulators should balance their concerns for policyholder protection with other socioeconomic by elected representatives and the marketplace decisions objectives, such as promoting savings freely made by consumers. Anything beyond that is regulatory overreach.” When looking at the top priority for national policymakers 39% in shaping the role of the insurance industry, nearly two- 48% fifths (39%) of insurers say that it should be compulsory for 13% individuals and businesses to insure their property. One in three would like to see policymakers promote the role that Policymakers should incorporate insurers can play in alleviating the impact of the demographic socioeconomic goals into regulators remits “time bomb”. Source: Economist Intelligence Unit.15 © The Economist Intelligence Unit Limited 2013
  17. 17. Insurers and society Challenges and opportunities in the period to 2030 5 Confronting climate change Natural disasters cost insurers across the world are less convinced, however, with one-half in US$65bn in 2012, with estimated insured losses agreement, compared with 55% of insurers. from the US Superstorm Sandy accounting for as much as US$25bn alone. Insurers play a critical Insurance Europe’s Mr Jones says: “Natural role in supporting businesses and individuals catastrophes represent a big issue for the after such events, but also in tackling the insurance industry, particularly for reinsurers probable causes of disasters before they occur. that take the brunt of the extreme weather conditions worldwide. Insurers and reinsurers More than one-quarter (27%) of respondents aim to offer policies that are sufficient to cover say that climate change is one of the top three potential claims, but the increasing severity issues affecting non-life insurers, reflecting the of natural catastrophe damages, due to both growing economic impact of associated socioeconomic reasons and climate change, can natural disasters. pose difficulty in offering sufficient cover.” More than one-half (53%) believe that the Following the March 2011 Japanese earthquake industry plays an important role in disaster risk and tsunami, which is estimated to have cost management, providing crucial disaster risk insurers US$310bn, Takashi Okuma, general financing and reducing the opportunity cost of manager in the international department of a disasters (only 7% disagree). Intermediaries Japanese trade body, the General Insurance Chart 13 Do you agree or disagree with the following statement? Insurance plays a key role in disaster risk management, providing crucial disaster risk financing and reducing the opportunity cost of disasters (% respondents) Agree Neither agree nor disagree Disagree 53% 40% 55% 39% 50% 42% 7% 6% 8% Overall Insurers Intermediaries Source: Economist Intelligence Unit.16 © The Economist Intelligence Unit Limited 2013
  18. 18. Insurers and society Challenges and opportunities in the period to 2030 Association of Japan (GIAJ), says that insurers’ This figure looks set to rise as supposedly one- responses to the disaster “reaffirmed the value of in-50-year flooding events might occur more general insurance and the critical roles it plays”. frequently or have more significant financial consequences, given that population growth In addition, Mr Okuma notes: “It also raised has forced migration to more susceptible areas, awareness of the effectiveness and robustness meaning that weather events have a greater of the Residential Earthquake Insurance adverse impact. system in Japan, a private and public-sector risk-sharing scheme. Helping our customers Mr Godfrey of L&G says: “This risks insurers being in times of emergency also allowed us to unable to provide cover at affordable prices. reaffirm our confidence in our ability—backed To date the issue has been contained under the by proper systems—to promptly pay out proper principles [which allow flood insurance to be insurance claims and thereby fulfil our social and available widely without distorting the market] economic role.” agreed between the industry and government. These expire in 2013 without a clear agreement In the UK, flooding has become one of the most as to the future arrangements. The issue has expensive areas for insurers. The ABI says that been compounded by government actions over insurers have paid around £5bn to households many years [including] underinvestment in flood and businesses affected by flooding since 2000. defences and building on flood plains.” Chart 14 Do you agree or disagree with the following statements? (% respondents) Agree Neither agree nor disagree Disagree 55% 31% 81% 14% 15% 6% Without adequate data, re-insurers The scale of natural disasters in recent may pull back from providing years has raised awareness of the catastrophe re-insurance in benefits of insurance in mitigating emerging markets the impact of such disasters 75% 17% 55% 35% 8% 10% The recent increase in costly The absence of data over the risk catastrophes will result in a of catastrophes in emerging markets hardening of premiums makes it difficult to properly assess the risks that insurers may be taking in these regions Source: Economist Intelligence Unit.17 © The Economist Intelligence Unit Limited 2013
  19. 19. Insurers and society Challenges and opportunities in the period to 2030 Insurers are factoring in a growing number of The same number of respondents (55%) agree consequences from climate change, including that without adequate data, reinsurers may less obvious issues such as the impact on mental withdraw from providing catastrophe reinsurance health, which in turn requires more data and in emerging markets. By far the highest level of modelling sophistication. As a consequence, agreement is from Asia, where nearly two-thirds policyholders may see their premiums rise or (61%) of those surveyed agree. insurers could withdraw from certain markets entirely, particularly where statistics are limited. However, 81% of all respondents agree that the scale of natural disasters in recent years has Three-quarters of respondents agree that recent raised awareness of the benefits of insurance in costly catastrophes will result in a hardening mitigating the impact of such extreme weather of premiums, while more than one-half (55%) events, and this was particularly the case in Asia- believe that the absence of data over the risk Pacific, where just 5% of respondents disagree. of catastrophes in emerging markets makes it difficult to assess the risks properly.18 © The Economist Intelligence Unit Limited 2013
  20. 20. Insurers and society Challenges and opportunities in the period to 2030 6 Evolving to meet changing needs As society evolves, the risks that it needs to industry is keeping up with consumers’ needs. insure against change accordingly, creating both Intermediaries are more likely to agree than challenges and opportunities for insurers. insurers (78% and 72% respectively), and North American insurers are more confident than their One-third of respondents say that rising European and Asian counterparts (76% versus longevity will be a challenge for life insurers in 68% and 72% respectively). the period to 2030. At the same time, 19% of respondents say that fundamental changes to the However, this confidence in the ability to meet structure of society will be a challenge for non- consumer needs is somewhat at odds with the life insurers. adjustments that respondents say are being made Irrespective of these challenges, three-quarters by insurance companies as a reaction to changes of those surveyed agree that the insurance in their industry. Chart 15 Do you agree or disagree with the following statement? Insurers are keeping up with what consumers need (ie, protecting new technology, reflecting modern lifestyle choices) (% respondents) Agree Neither agree nor disagree Disagree 75% 16% 72% 20% 78% 11% 9% 8% 11% Overall Insurers Intermediaries 76% 68% 24% 72% 16% 22% 8% 13% 2% North American insurers European insurers Asian insurers Source: Economist Intelligence Unit.19 © The Economist Intelligence Unit Limited 2013
  21. 21. Insurers and society Challenges and opportunities in the period to 2030 Chart 16 However, when asked how life insurers should change their products and businesses, less than How ARE life insurers changing their product offerings in one-quarter (22%) of respondents say that they response to changes affecting their industry? should offer fewer products, compared with just (% respondents) one-quarter who suggest limiting guarantees. Insurers Intermediaries Overall Simplifying 28% The disparity suggests that insurers are products 35% 42% having their hands forced by both challenging Offering fewer 45% macroeconomic conditions and the impact of products 49% 54% tough regulation. Were conditions more benign Limiting 42% 40% and regulation less severe, it may be the case guarantees 38% that insurers would make fewer changes to their Increasing 29% product ranges and business models. prices 35% 41% The ACLI’s Mr Brostoff says: “Some [US] More accurately 32% linking price to risk 30% companies have reduced their offering of certain 29% Ensure products lines of insurance. The lines primarily affected 20% met consumers 19% include certain types of annuities and long-term 19% changing needs care insurance.” How SHOULD life insurers change their product offerings in Such limitations to product ranges, particularly response to changes affecting their industry? those which offer long-term guarantees such as (% respondents) annuities, might result in consumers being less Insurers Intermediaries Overall able to rely on the private sector to underpin Simplifying 8% retirement funding and other long-term savings. products 14% 20% Offering fewer 21% Two-fifths of respondents agree that if life products 22% 22% insurers take the actions they should take—given Limiting 26% existing regulation, tax legislation, accounting guarantees 25% 24% standards and shareholder pressure—the Increasing 25% provision and effectiveness of private personal prices 19% pensions will be harmed. Intermediaries are 13% More accurately more likely than insurers to believe this to be true 11% linking price to risk 13% (43% versus 38%). 15% Ensure products 7% met consumers 7% The survey also revealed a desire to drive out 7% changing needs short-termism. One-half of respondents agree Offset more risk 3% that regulation and accounting standards in their 2% through reinsurance 1% and catastrophe own country encourage short-term thinking by bonds issuance insurers, while more than one-half (54%) believe Note. Figures do not add to 100% as respondents could select more than one option. that regulators and legislators are focusing on Source: Economist Intelligence Unit. near-term stability at the expense of longer-term economic growth. Two-fifths of those surveyed say that life Both US and European regulators refute the insurers are limiting guarantees, while nearly suggestion that legislation drives short-termism. one-half (49%) believe that they are offering Mr Montalvo at the EIOPA claims that Solvency fewer products, with more than one-half (54%) II promotes long-term thinking, while the of intermediaries saying that this is the case. NAIC’s Mr Donelon says: “Regulators generally20 © The Economist Intelligence Unit Limited 2013
  22. 22. Insurers and society Challenges and opportunities in the period to 2030 believe it is stockholder demands for profitable Chart 17 returns that drive short-term thinking in the insurance industry.” Do you agree or disagree with the following statements? (% respondents) However, more than one-half (56%) of respondents agree and only 7% disagree that, Agree Neither agree/ Disagree nor disagree because policymakers are typically elected for short terms, there should be more crossparty or constituency groups of policymakers that can 34% examine the challenges and solutions of issues such as savings and pensions over a long-term 50% horizon. 17% The UN Principles for Sustainable Insurance, Regulation and accounting standards in my country, as currently drafted, which came into force in June 2012, represent a encourage short-term thinking by insurers step to promote global best-practice standards for the industry and have been generally well received. Yet there remains scope for more 30% collaboration between regulators, trade bodies and the insurance companies themselves. 54% 16% For the non-life insurance and reinsurance sector, more than two-fifths (43%) of Regulators and legislators are respondents say that they are increasing prices, focusing on near-term stability with European insurers most likely to note that at the expense of longer-term growth economic growth they are doing this (52%). Almost one-half (46%) of intermediaries say that insurers are increasing Source: Economist Intelligence Unit. prices, compared with 39% of insurers. Looking at how non-life and reinsurers should change their products, nearly one-quarter (23%) of products if we can’t meet minimum returns, pass respondents believe that there should be price more risk back to the customer, increase the price increases, while 22% favour limiting guarantees. or a combination of those. It is vital to ensure that high capital is really needed, because there Again, as with the life insurance sector, these are areas where the regulations overestimate the results suggest that non-life insurers are true risk. Second, a balance is required between being driven to change their product ranges in protecting the consumer by raising capital ways they may not have done if it were not for requirements and guaranteeing the consumer a regulatory pressure and economic uncertainty. wide choice of products.” Mr Jones of Insurance Europe says: “When Insurers are clearly concerned that the regulators increase capital requirements it regulatory demand to hold more capital to has an impact on our policyholders. This is protect policyholders could have the perverse because our shareholders demand a certain consequence of actually driving up prices return on investment and capital has to be and pushing some customers out of the funded by shareholders, so more capital insurance market. means shareholders will get a lower return. Consequently, when capital requirements However, Mr Montalvo at the EIOPA says that increase, we either have to stop selling certain additional capital requirements are justified.21 © The Economist Intelligence Unit Limited 2013

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