Financial Stability Tops List of Insurers’ Concerns: Geneva Association

January 19, 2012

A newly published study from insurance think tank the Geneva Association analyzes the principle concerns facing the industry in 2012. The current global financial instability tops the list. It’s closely followed by concerns over governmental management of natural catastrophe risk and the demographics of dealing with aging societies.

On the financial crisis Secretary General and Managing Director Patrick M. Liedtke explained that “no other topic has worried nation states around the world more persistently in 2011 than the question of global financial stability. And with as yet so many unresolved issues, ranging from a reappraisal of the risk-free nature of sovereign debt to significant new regulation and the further strengthening of the global financial system, the topic will remain at the top of the list for 2012 for insurers.”

He pointed out that financial regulation has a “profound impact on the way capital markets and financial systems operate as well as the velocity and parameters of their evolution. Only with a profound understanding of the technical issues can regulators effect sound and efficient reforms, especially for such idiosyncratic industries as insurance. Insurance is a highly complex business and is not readily comparable with any other, even if they share some common elements.”

As most people within the industry are well aware, how it functions is not “always well understood by those outside the industry,” Liedtke continued. “This creates the risk of a misunderstanding of its operations and raises the likelihood of potentially unintended consequences of a particular regulatory action.”

Liedtke stressed that the “next months will see some of the most important decisions made on insurance regulation. The changes arranged during this period – for the first time ever orchestrated through the G-20 at the global level – will be very significant for the insurance industry. It is vital, therefore, that any decisions made fully respect the role of insurance and facilitate sound and sustainable risk management and risk transfer solutions upon which our modern economies depend so much.”

The number of claims from the natural catastrophes that struck in 2011 make it “by far the most expensive year on record for natural catastrophe insurance with estimated claims reaching some US$ 380 billion,” Liedtke stated. Even given some variation from current loss estimates, 2011 will “turn out to be nearly two-thirds more expensive than 2005, the next most expensive year (US$ 220 billion). But the issue here is not only one of claims and payouts –it is one of human tragedies and loss.”

He noted, however, that while the dire impact on the countries and their people from natural catastrophes tended to focus relief efforts and united people around the globe, “little advancement was made on the underlying question as to how to deal with the existing vulnerabilities and the risks they are exposed to.

“Few governments thoroughly revisited their national risk management –if they even have one. In 2012, governments must make progress in understanding the risks their country and its citizens are exposed to and how to manage them properly.”

He urged governments to recognize the methods and measures taken by the insurance industry to “establish comprehensive risk management processes. The techniques and tools are readily available and while paradoxically many governments expect their industries, and especially the high risk industries, such as nuclear, chemical or transport, to install efficient enterprise risk management systems, they themselves often neglect to do so at the national level.”

Even though climate change is closely related to many of the natural catastrophes, Liedtke pointed out that the debate on the subject has “been driven down the list of priorities.” Over the last two years “the global debate has failed to produce any tangible and significant results.”

He added that, even though the “Geneva Association distances itself from endorsing certain studies or specific views on climate change, we do believe that one has to be ready for certain eventualities that many experts consider likely, even if they might occur on a very long timeline and with uncertain probabilities.”

The aging populations in the industrialized countries are a third major concern facing both governments and the insurance industry. While living longer lives is a positive for the people who do so, it poses a dilemma for the governments of the countries in which they live, which is in turn worsened by the financial crisis.

“In light of the current state of many sovereigns and their finances, they do so facing greater uncertainty than any other retirees in several decades,” Liedtke explained. “Doubts over heavily indebted states’ ability to provide social security have increased. Volatile returns from many private sector investment products have eroded confidence in pension provisions and retirement planning. Yet, individuals continue to seek stable streams of income that will afford them a decent standard of living beyond their working years.”

In conclusion Liedtke urged both society and politicians to “grasp the nettle and face up to the inevitable implications of these long standing challenges. Given the role of the insurance industry and its ability to provide long-term stability, it has the potential to be a significant part of the solution to this problem. This is a great opportunity for all involved. In 2012, insurers should raise the profile of this issue and be the leading private sector counterparty to help governments develop a credible and sustainable way forward.”

Source: The Geneva Association

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