A.M. Best list includes megaquakes, hyperinflation and alternative capital
A huge catastrophic event is the main threat to the insurance sector, according to A.M. Best.
The rating agency divided its list of top ten threats into two camps: ‘knock-out punch’ and ‘slow painful death’ depending on how quickly the danger would affect an insurer.
However, A.M. Best added that some of the threats are also potential opportunities, as governments, industry and individuals seek to transfer risk.
Threats in the first group are:
Mega catastrophic event (such as an earthquake in Los Angeles or a large terrorist event)
Financial system shock (caused by interconnected global markets)
Risk management shortfall (where a gap appears between an insurer’s risk appetite and the ability to manage it)
Hyperinflation (where a sudden spike means insurers cannot reflect rising losses in pricing, or rely on reserving)
Model error (If capital management is scuppered by faulty risk modeling)
Threats in the second group are:
Regulation (if overcautious regulation leads to unnecessary ring-fencing of assets, crippling other parts of the business)
Alternative capital (if a permanent soft cycle is created and traditional players are usurped)
Emerging underwriting risk (where firms fail to detect a loss exposure before writing lots of business)
Interest rate spike (if a rise of more than 200-300 basis points creates a big loss in fixed income portfolios)
Loss of entrepreneurial spirit (Where the sector is unable to attract innovators and problem solvers)