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Macro-Economy and Interest Rates are the Top Risks for Insurers in Central and Eastern Europe

Date: 08/20/2015
Source: PwC
‘Banana Skins’ poll reflects industry risk perception

According to ‘Insurance Banana Skins 2015’, a new survey charting risks in the global insurance sector, concerns about macro-economic conditions and interest rates have overtaken regulation as the biggest risks facing insurance companies in Central and Eastern Europe.

Insurance Banana Skins 2015 (2013 ranking in brackets)
  1. Macro-economy (3)
  2. Interest rates (n/a)
  3. Guaranteed products (14)
  4. Business practices (2)
  5. Regulation (1)
  6.  Investment performance (5)
  7. Cyber risk (n/a)
  8. Distribution channels (16)
  9. Climate change (22)
  10. Change management (17)
  11. Natural catastrophes (6)
  12. Quality of risk management (8)
  13. Product development (20)
  14. Corporate governance (19)
  15. Quality of management (11)
  16. Market conditions (n/a)
  17. Long tail liabilities (10)
  18. Social change (n/a)
  19.  Human talent (12)
  20.  Reputation (9)
  21. Capital availability (18)
  22. Political interference (4)
  23. Terrorism (27)
  24. Complex instruments (25)
  25.  Pollution/contamination (26)
Source: CSFI (Insurance Banana Skins 2015)

Top risks

Not surprisingly, macro-economic risks have risen to the top of the list of business threats to insurers. The economic outlook continues to be uncertain as markets in Central and Eastern Europe are adversely affected by the Eurozone crisis in the west and geopolitical uncertainty in the east. The macro-economic environment has a major impact on the demand for insurance products and their profitability. Insurers are reacting by reducing operating costs and focusing on the profitability of business.

The persistently low interest rate environment was seen as a more severe threat in Europe than any other region. This risk was a new entrant in this year’s survey and debuted in the number 2 position in CEE and number 3 globally. As a result, insurance companies are struggling with lower investment performance, which in turn adversely affects overall financial results. Furthermore, insurers which offered savings products with guaranteed returns when interest rates were high back in the 1990’s are now facing losses because insurers cannot earn high enough returns to fund the liability.

“The adverse economic conditions and low interest rates have brewed a ‘perfect storm’ which threatens the investment income which is vital to all insurance businesses, while creating challenges with respect to guaranteed products in life businesses. In combination, these risks threaten to squeeze long-term profit margins. To ensure sustainable success in this environment, insurers need to review their products and investment strategies in terms of both ROI and matching maturities to insurance liabilities. Product innovation will be key to maintaining competitiveness and profitability”, stated Alexandra Smedoi, Director, Financial Sector Tax Consulting Team, PwC Romania.

Regulation is seen as the top risk globally for the third time in a row, and the fifth biggest risk in CEE. Regulation – and in particular the 2016 deadline for Solvency II implementation - is creating additional uncertainty in an already difficult market. Companies are struggling with increased demands and costs of compliance with regulations.

The issue of business practices is very much on the mind of insurers, particularly in relation to unethical sales of life insurance products by intermediaries. In an attempt to address these risks, regulators are introducing consumer protection legislation to provide better oversight over intermediaries and distribution channels - adding yet another dimension to the regulatory compliance burden.

Cyber risk is a growing concern around the world, and has debuted in seventh place in Central and Eastern Europe and in fourth place worldwide. After several high-profile security breaches of health insurance companies in the US, both customers and insurers are worried about the security of sensitive personal data. National regulators have also taken notice and implementing new legislation to assist insurers in managing and mitigating IT risks.

Areas of improvement


Despite escalating economic, regulatory and industry pressures, insurers in Central and Eastern Europe feel more confident in their ability to respond to business risks than they did 2 years ago. According to this year’s Banana Skins survey, the “Preparedness Index” for Central and Eastern Europe rose to 3,18 (out of 5) in 2015, up from 2,93 in 2013.

“In the 2013 Insurance Banana Skins survey, regulation was considered the highest risk in CEE, mainly due to uncertainty about Solvency II readiness and the related cost/benefit ratio. Since then, we have observed a greater emphasis on managing risk and compliance among insurance companies in CEE. Insurers are investing in good governance, tighter controls, and more secure IT systems. We are very encouraged by the progress made so far, but there is still much to be done. The regulation itself, if taken as more than just a compliance exercise, can help insurers with faster identification and assessment of risks and better risk management. We encourage insurers to take that extra step in the process to get the most out of it”, concluded Alexandra Smedoiu.

About the report

The CSFI’s ‘Insurance Banana Skins 2015’ survey, conducted in association with PwC, polled over 800 insurance practitioners and industry observers in 54 countries to find out where they saw the greatest risks over the next 2-3 years. The CEE report is based on 34 responses from the Czech Republic, Poland, Slovakia, Latvia, Croatia, Hungary and Russia.

To download the full global report, go to www.pwc.com/bananaskins. To download the CEE supplementary report, go to www.pwc.pl/en/publikacje/2015/ceeinsurancebananaskins.jhtml.

The 2015 survey is the latest in the CSFI’s long-running Banana Skins series on financial risk. Previous Insurance Banana Skins surveys were in 2007, 2009, 2011 and 2013.

About CSFI

The CSFI (Centre for the Study of Financial Innovation) is a non-profit think-tank, founded in 1993, which looks at challenges and opportunities for the financial sector. It has an affiliate organisation in New York, the New York CSFI. www.csfi.org

About PwC

PwC is a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. More information is available at the firm's website, www.pwc.com

PwC has been active in Central and Eastern Europe for more than 25 years. Today, the network consists of 280 partners and more than 8,000 staff in 54 offices across 29 countries. We are the only professional services firm to have a fully integrated network spanning Central and Eastern Europe and former CIS countries.

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