Ernst & Young report says insurers have made clear changes
While the insurance sector has been less directly impacted by the recession in comparison to other financial services businesses, most insurance companies were surprised by the depth and magnitude of the downturn, according to a new report from Ernst & Young.
According to Lessons from change: regaining the balance in the insurance industry, insurance companies must now focus on evaluating and assessing potential exposure to extreme risks if they are to better anticipate, manage and respond to future stress events.
Peter Porrino, Ernst & Young’s Global Insurance leader, says: “For the past year, progressive insurers have been responding to the pressures of an evolving economic landscape. Speaking to our clients we have heard how companies around the world are deploying approaches to manage credit exposures and regulatory capital, as well as focusing on redesigning and re-pricing certain products. Executives are not only applying strategies to manage and protect their businesses, they are also focusing on growing and reshaping their organizations and considering how best to guide them in the future.”
The report highlights a number of lessons that insurers have learned from the crisis:
- Most insurers have learned to secure a capital buffer over and above what is predicted by economic capital models. It’s equally important to develop actionable strategies for moving capital from one legal entity to another during a crisis.
- An enterprise-wide approach to risk management is important to future success. Insurers with the right asset protection mechanisms in place have emerged among the strongest in the downturn. The chief risk officer (CRO) should work with business units in making strategic and operational decisions and passing these up to the boardroom for final sign-off
- Sophisticated insurers are re-evaluating the size and shape of their business from the top down. The companies that responded most quickly to the crisis were among the most nimble. Leaders are asking if their business is flexible and scalable for the market upturn; is it truly aligned with the strategic objectives of the business?
- Insurers are divesting certain businesses or product lines and reinvesting in their core businesses for future growth.
- The insurance industry is well-placed to take advantage of new market and product opportunities. The ‘third age’ retirement sector requires new savings and pensions products, which insurers are well placed to deliver because of their experience in underwriting older age mortality. In addition, geographies such as Southeast Asia, Latin America, the Middle East and Eastern Europe represent opportunities to deliver insurance products to a growing customer base. However, insurers must embark upon the right strategies and mode of market entry if they are to be successful.
Lex van Overmeire, insurance leader for Europe, Middle East, India and Africa, says: “The insurance industry has done well to emerge relatively unscathed from the downturn but we are now entering a new and changing world. Insurance leaders able to demonstrate ingenuity, the courage to make tough decisions and the foresight to apply lessons from change will guide their companies to success in the sector. At the same time they also have to restore confidence levels with customers as well as investors and other stakeholders, in order to create a sustainable future for the sector. These will be the leaders who establish the foundation upon which our new global economy will rise.”