2012 will undoubtedly be a challenging year, but Guy Carpenter believes that growth opportunities exist - or can be created - for companies that have the fortitude to see and develop them. Below we examine Themes 6 through 10 of the 10 major themes that the (re)insurance sector will face in 2012. (Themes 1 through 5 were examined in a prior GC Capital Ideas post.)
Theme #6: Dodd-Frank Act
How big is too big? Are any insurers in danger of bringing down the financial system? The Dodd-Frank Act will help monitor the insurance industry and determine which insurers are SIFIs (systemically important financial institutions).
While Solvency II continues to dominate the regulatory landscape in Europe, the Dodd-Frank Act in the United States expanded the ability of regulators to oversee large companies that could prove to be a threat to the financial system by establishing the Financial Stability Oversight Council (FSOC). However, the number of insurers subject to systemic risk oversight is expected to be small. Whether Federal Reserve Board regulation and probable enhanced capital requirements for those companies will cause a competitive disadvantage, or whether “too big to fail” status is ultimately a benefit, remains to be seen. Separately, the Federal Insurance Office (FIO), set up to monitor the industry, is scheduled to issue its study on state insurance regulation in January 2012.
Theme # 7: FASB-IASB Reconciliation
Accounting is the language of the financial world. Learning multiple accounting “languages” can cause an insurer a financial faux pas. FASB and IASB are hoping to eventually eliminate the needs for “translators.”
Another crucial change due to take place in 2012 is the International Financial Reporting Standards (IFRS) insurance contracts project. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked towards convergence on a worldwide standard and have made a number of tentative decisions, but there are more decisions that must be made.
Theme #8: Lloyd’s of London - Positioning for the Future
Lloyd’s is on the path to becoming the “United Nations” of the insurance world. It is slated to become the market where global risks and solutions converge.
In 2010, 43 percent of the Society’s gross written premium came from the United States and Canada, with Europe accounting for 36 percent. Asia and the Pacific region only accounted for 10 percent and Latin America just 7 percent. Economic research suggests that China will be the world’s largest economy by 2030, and India, Russia and Brazil will all feature in the top six global economies. Lloyd’s is therefore looking to form stronger business ties with these markets in conjunction with the broker network, to ensure it maintains pace with the opportunities from the emerging economies.
Theme #9: Cyber-Risk
Occupy Wall Street, WikiLeaks, Sony® PlayStation® and Citigroup®’s hacker attacks are all reminders of the power and risks of the cyber world. Companies and governments need protection and solutions against cyber-risk. The insurance sector will play a significant role in mitigating this risk.
As concerns about privacy and data breaches grow, so will the interest in cyber-liability insurance. In a 2011 survey, Betterley Risk Consultants estimated the US cyber-risk insurance market to be about USD800 million, up from USD600 million last year. This growth is expected to continue. As the world becomes more connected and technology continues to evolve, companies will require more solutions to manage cyber-risk.
Theme #10: Cold Spots
Exposures previously considered ‘cold spots’ caught many insurers by surprise in 2011. As the international insurance penetration and wealth grow, carriers must focus on emerging ‘peak’ risks in areas which would not have been considered risky in the past. This is a by-product of the increasingly global economy in which insurers operate.
Such globalization will inevitably lead to increased demand for reinsurance in new regions and markets that have not historically been considered peak zones. This, in turn, will see losses becoming ‘internationalized’ to an extent never before seen and further reinforce the need to understand exposures, particularly in non-modeled countries.