Technology and cyber risk continue to dominate insurer risks

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Victor Muguto | Long-term Insurance Leader | PwC Africa | mail me |


Technology, cyber and change management risks have been pinpointed as the three biggest concerns for insurers across the globe, according to a poll of more than 900 senior industry experts.

The Centre for the Study of Financial Innovation’s (CFI) latest Insurance Banana Skins 2019 survey, in association with PwC, polled over 900 insurance practitioners and industry observers in 53 countries, to find out where they saw the greatest risks over the next two to three years.

There were 28 responses from South African insurers. The biennial survey identifies the risks, or ‘Banana Skins’, facing the global insurance industry.

Contributing factors

Given our very difficult economic environment, it is not surprising that macroeconomic risk was ranked the number one concern in South Africa, compared to a Global ranking of 9th.

South African respondents pointed out the almost negative GDP growth rates, low disposable income, and persistent high unemployment levels as significant contributing factors. Socio-economic and political uncertainty have also slowed down the pace of economic and insurance sector growth across the rest of Africa.

Despite the uncertainty, Africa’s insurance markets remain some of the least penetrated in the world and the opportunities for growth are immense. The need for insurers to be more agile and innovative in an environment where insurers and their customers are rapidly becoming more technologically empowered has never been more critical.

Threats posed by cybercrime were cited as the second biggest concern by South African insurers, which is consistent with the global rankings. This is a rising risk for those brokers, insurers and re-insurers involved in under-writing this emerging risk, with some very difficult pricing decisions.

It also is becoming a huge risk across the entire insurance value chain, given that the various industry players are custodians of customer information and data. Cyber concerns have intensified rapidly over our last few surveys. The insurance industry faces a barrage of attacks from criminals and other perpetrators, many of who are extremely sophisticated, the report suggests.

Technology risk

Difficult investment markets feature heavily in the outlook for the insurance industry, more so among South African insurers who ranked this risk 3rd, compared to the Global ranking of 5th.

While technology was only rated 4th by South African insurers, relative to the global ranking of 1st, it has risen significantly relative to the previous ranking at 11th in 2017. This is the first year that technology risk has topped the global Banana Skins rankings. It received the highest score of any risk that has been surveyed since 2011.

The unrelenting heavy agenda of regulatory change continues to keep regulatory risk at the top end of the risk rankings, with South Africa ranking this risk 5th, compared to the Global ranking of 4th.

Survey respondents expressed frustration with the cost and distraction of compliance and warned of the potentially damaging effects that disproportionate requirements could have in areas such as capital, consumer protection and product availability.

In 2017 we saw regulation drop overall, with change management rising as the top risk. Two years on, the sector is projecting a rise in the threat of regulatory risk. This has been driven by new areas of regulation introduced since 2017 including General Data Protection Regulation (GDPR) in Europe and various new conduct standards across the globe. The pressure applied by upcoming new accounting standards, particularly IFRS 17 has amplified the issues. The task of addressing and implementing these new regulatory standards, in the mandated time frame, is proving to be a challenge for insurers everywhere.

– Stephen O’Hearn, global insurance leader at PwC

The risk that inadequate response to change management will damage insurers continues to be seen as urgent, taking 6th spot in South Africa, and 3rd on the Global rankings.

The pressure for change is being driven or enabled by technologies such as artificial intelligence, the impact of new entrants, the formidable agenda of digitisation as well as radically different customer expectations. The main concern is that insurers do not have sufficient resources to manage and implement the required changes.

Severe skills shortages

Insurers continue to find it difficult to attract and retain technologically empowered talent. This risk continues to rise, with South Africa ranking this at 7th relative to 8th on the Global list.

Demand was urgent in those technical roles where there already are severe skills shortages – such as data scientists, actuaries, and regulatory specialists. Emigration and the loss of experienced talent to competing industries were also cited as major contributing factors in South Africa.

The last two editions of this survey show that the industry has shifted its focus to risks related to technology – due both to rapid changes in the external environment and an urgent need for business and technology modernisation. Many insurers are encumbered with legacy business models and IT infrastructure which are not well equipped to handle the changing demands of the industry. These trends are set to continue as the insurance market transforms through automation and digitisation.

– Pieter Crafford Financial Services Advisory Lead for PwC South Africa

It is notable that the overall tone of the responses this year is the most negative since the Banana Skins analysis began. This is mainly due to the scale of challenges facing the industry through technological and structural change, and concerns about the industry’s ability to manage change successfully.

Despite the drop-in sentiment, the overall view on insurers’ ability to handle these risks is that they are becoming better prepared to respond to the changing environment.

Rankings

While the table below highlights some of the differences between South African and overall Global rankings, the main themes, including the rising significance of technology, cyber risks and change management, as well as the persistence of regulation at the top, are consistent. The previous survey rankings are shown in brackets.

Global Ranking South Africa Ranking
1. Technology (3) 1. Macro-economy (1)
2. Cyber risk (2) 2. Cyber risk (2)
3 Change Management (1) 3. Investment performance (5)
4. Regulation (6) 4. Technology (11)
5. Investment Performance (5) 5. Regulation (4)
6. Climate change (-) 6. Change management (6)
7. Competition (8) 7. Human talent (3)
8. Human Talent (9) 8. Credit risk (-)
9. Macro-economy (7) 9. Reputation (9)
10. Interest rates (4) 10. Political risk (13)
11. Political risk (11) 11. Cost reduction (17)
12. Cost reduction (13) 12. Competition (12)
13. Reputation (17) 13. Climate change (-)
14. Guaranteed products (10) 14. Quality of management (15)
15. Business practices (12) 15. Business practice (8)
16. Quality of management (14) 16. Corporate governance (20)
17. Credit risk (-) 17. Guaranteed products (19)
18. Social change (16) 18. Interest rates (10)
19. Corporate governance (19) 19. Social change (16)
20. Capital availability (20) 20. Brexit (22)
21. Brexit (22) 21. Capital availability (21)

In conclusion

Challenging the status quo and encouraging a move from traditional thinking, attitude and behaviours were suggested as the most effective ways in which these top risks can be managed.

The transformation of the industry with this new wave of industrialisation requires diversity in thinking the best ways to innovate in this changing environment.


 

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