Introduction: New forms of risk require new approaches

Welcome to Uncharted waters: Tackling reinsurers' riskiest exposures. The report explores the most serious risk concerns among the reinsurers that took part in the Insurance Banana Skins Survey 20171, and how to deal with them.

Insurance Banana Skins is a unique survey of the issues at the top of the industry's risk register and how these perceptions change over time. The biennial report is produced by the The Centre for the Study of Financial Innovation (CFSI) in association with PwC.

What's most striking about the latest set of results is how far and how fast the risk landscape is shifting. Having for many years been dominated by the familiar headaches of solvency regulation and a challenging market environment, the risks that now cause the most sleepless nights are rooted in the shock and uncertainty of the new.

At number one is cyber risk, reflecting both the anxieties of underwriting a risk that's constantly shifting and the rising threat to reinsurers themselves. Far from being just a technology risk, cyber is now a huge reputational and systemic concern.

At number two is the industry's ability to address a formidable agenda of new technology and shifting customer and conduct expectations, along with the associated pressure on service, performance and costs. Signs of the upheaval are all around us, from new forms of underwriting and risk transfer, to increased automation and inroads from InsurTech right along the value chain. And even more disruption is coming up on the horizon in areas ranging from artificial intelligence (AI) to driverless cars.

We also focus on what the Banana Skins survey describes as 'political interference' on account of its rapid rise up the risk rankings and particular relevance to prominent reinsurance centres, notably the UK and Bermuda. As a global industry, reinsurance faces considerable challenges from the political developments, changes in trading arrangements and the shift towards more nationalistic rather than global approaches. Our analysis of the implications looks in particular at the implications of Brexit and an uncertain US tax agenda.

Threats and opportunities

What cuts across all cyber risk, change management and recent political upheaval is the limited experience in dealing with them, and hence the need for new thinking and fresh approaches to risk management. The strategic nature of these risks mean that the response will determine the success and even survival of market participants. At the same time, they present opportunities to capture valuable new sources of revenue and lead innovation in a rapidly evolving global marketplace.

Down but by no means out

A notable faller in the list of risk concerns is regulation, having been in reinsurers' top three in the previous Banana Skins reports in 2013 and 20152. This is largely because recent regulatory changes predominantly relating to solvency are settling into business as usual (e.g. Solvency II), though the cost and complication of regulation continue to be a concern, including for example, developments in conduct and intermediary regulation3. Linked to this, recent geopolitical developments, including Brexit and changes in trading arrangements, create a range of regulatory challenges in key areas including market access and cross-border supervision. We look at these impacts as part of our focus on the three leading risk concerns.

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Footnotes

1. The Insurance Banana Skins Survey 2017 draws on the perspectives of 836 practitioners and close observers of the industry in 52 countries, of which 58 were reinsurers (http://www.pwc.com/gx/en/industries/financial-services/insurance/insurance-banana-skins-2017.html). The survey is the latest in the CSFI's long-running Banana Skins series on financial risk. The report is prepared by the CSFI, which is solely responsible for the editorial content, with support from PwC.

2. Insurance Banana Skins 2013 and 2015 (http://www.csfi.org/insurance-banana-skins/)

3. IAIS Consultation on ICPs 18 and 19 (Intermediaries and Conduct of business) https://www.iaisweb.org/page/consultations/current-consultations/revision-of-icps-12-18-19-and-24

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