A perfect storm of shifting variables is pushing the insurance sector to make changes in how it does business, according to the most recent survey of insurance leaders released today by State Street Corporation (NYSE:STT).
State Street’s study, conducted jointly with The Economist Intelligence Unit, surveyed more than 300 insurance executives globally and focused on the key industry issues and opportunities facing the insurance industry and their preparedness in meeting those challenges. The study, “Facing the Future: Blueprint for Growth,” will be released next month and highlights three broad categories affecting the insurance industry that include risk, regulation and the restructuring of product offerings:
- Managing risk is a core competency for insurance firms, and less than one-third of respondents say it poses any difficulty for them, however, 80% of respondents say they are actively considering increasing their allocation to alternative strategies as they look for sources of additional yield, which may add additional, more unfamiliar risk,
- More than 80% of insurers feel that adapting to evolving regulation represents a challenge. Only 17% view the regulatory environment as not posing a challenge at all; and
- Ninety-three percent see restructuring product offerings to bring new, innovative products to market quickly as a challenge.
“The new normal of ultra low interest rates is putting pressure on margins and evolving regulation is having a fundamental impact on operating models,” said Joe Antonellis, vice chairman of State Street. “While speed of execution is paramount, many insurance companies are left with operational roadblocks and dependencies — partly as a legacy of having expanded through years of mergers and acquisitions.”
Seeking New Opportunities Brings New Areas of Risk
Against this backdrop of market complexity, 82 percent of insurance leaders say that effectively allocating capital to the most business critical priorities presents a challenge for them today. Seeking additional capital, however, is creating additional risk for insurance companies that they may not be able to handle.
The challenge for the industry, however, is that insurers are confronting new areas of risk with which they are typically less familiar. These include reputational risk as they seek to appeal directly to consumers rather than via intermediaries, and the risks associated with utilizing alternative investments as part of their broader investment strategy. The study finds that many insurers are looking to alternatives amidst this low-yield environment and that the risk associated with this asset class may pose a challenge:
- Nearly half (49%) are prioritizing allocations to alternative strategies for action within the next 12 months,
- And 79% of insurers report that investing in more complex asset classes is a challenge for their firm.
Navigating the Changing Regulatory Environment
The evolving regulatory environment also poses additional challenges. The study finds that insurers are divided when asked about what the future holds. When considering the specific impacts of new regulation, three-quarters of respondents say that ensuring transparency of business policies and procedures presents a challenge. Solvency II in Europe and similar initiatives elsewhere underscore the focus on capital and transparency. In addition, changing tax and regulatory regimes addressing transparency, risk management and new capital requirements are resulting in further significant changes to the market landscape.
Further exacerbating the regulatory challenge is international expansion. Many insurance firms are eyeing global expansion as a response to more muted growth prospects in domestic markets. Increasing numbers of US and European companies are looking to expand into Asia Pacific, and Asian firms are considering regional expansion, despite the challenges of navigating multiple jurisdictions and regulatory regimes. Insurers are focused on global expansion, but 82 percent are concerned about their ability to do this successfully and only 18 percent seeing no difficulty related to expansion.
Restructuring of Products Brings Optimism
Despite the risks and challenges the sector is facing, there is optimism. The State Street study finds that insurance firms are confident in their outlook with 42 percent saying that insurers’ profitability will increase over the next five years. Insurers are taking immediate action to recalibrate products for the current macroeconomic environment, with 55 percent saying that they are looking at re-pricing new business to adapt to market conditions, including low interest rates, within the next 12 months.
Firms also see that demographics are changing and they must pursue younger consumers if they want to grow. Traditional distribution models are breaking down, and the internet is becoming a key sales channel. Eighty-one percent of respondents say that adapting distribution strategies to changing demographics is a challenge.
“The need to revamp products, overhaul distribution strategies and target new customers adds further complexity to challenges of risk, regulation and restructuring,” continued Antonellis. “While our research indicates that insurance firms are confident in their outlook, they face a complex set of decisions. Those firms that can successfully reposition themselves will have a significant opportunity to gain a competitive edge. While there are certainly headwinds facing the industry, there is still significant room for growth and improvement of profitability. That is a very good thing for the insurance industry.”
About the Survey
For a summary of the survey results please visit: http://statestreet.com/ourbusiness/.
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $25.4 trillion in assets under custody and administration and $2.2 trillion in assets under management at March 31, 2013, State Street operates in more than 100 geographic markets worldwide, including the U.S., Canada, Europe, the Middle East and Asia. For more information, visit State Street’s web site at www.statestreet.com.
This AUM includes the assets of the SPDR Gold Trust (approx. $62.7 billion as of March 31, 2013), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the marketing agent.