Climate Change No. 1 in Top 10 Risks Facing the Insurance Industry

Potential climate change is the greatest strategic risk currently facing the property/casualty insurance industry, with demographic changes taking priority for the life insurance industry, according to a new study by Ernst & Young.

Climate change is closely followed by demographic change and catastrophic events among the top 10 risks for insurers.

According to the Ernst & Young study, “Strategic Business Risk 2008,” the top 10 risks are:

1. Climate change: long-term, far-reaching and with significant impact on the industry.
2. Demographic shifts in core markets: offers business opportunities but risk that other sectors will capitalize first.
3. Catastrophic events: rising costs and serious impact on earnings for insurers.
4. Emerging markets: risk and opportunity but competitive threat from new players.
5. Regulatory intervention: increased scrutiny impacting operations and practices.
6. Channel distribution: technology is changing the way insurance is sold and purchased.
7. Integration of technology with operations and strategy: an enabler to keep pace with competition but lack of integration is a threat at the strategic business level.
8. Securities markets: changes in capital providers and the way capital is entering the insurance industry are causing major changes in the industry.
9. Legal risk: significant and unexpected change in the legal environment, such as government legislation or evolving case law, will continue to have a critical impact on the insurance industry.
10. Geopolitical or macroeconomic shocks: likely causes unknown but consequences potentially severe.

Many of these risks are interlinked, with the consequences from one risk having direct impact on others, according to the report.

For the new study, Ernst & Young and Oxford Analytica interviewed more than 70 industry analysts from around the world to identify the emerging trends and uncertainties driving the performance of the global insurance sector over the next five years. The study identified risks in three broad areas — macro, sector-specific and operational threats. It identified the top ten risks and five emerging threats.

The analysts also identified five emerging risks, just outside the top 10, which have the potential to become as significant during the next five years. These are: over-reliance on model-based risk management; threats to industry reputation; losing the war for talent; increasing exposure to global regulatory heterogeneity; and the possible emergence of entirely new risks.

“The top three risks — climate change and demographic shifts in core markets, and catastrophic events — are far reaching social and environmental trends with complex long term ramifications for the industry as a whole,” said Peter Porrino, global director of Insurance Services at Ernst & Young, asking: “Ten years ago, would climate change have been on top of anyone’s risk list?”