The Ernst & Young consulting firm today released a list of leading strategic insurance risks and risk management challenges headed by climate change, aging baby boomers who are shifting demographics and catastrophic events.
Lower on the firm's top 10 risk list were in order: emerging markets, regulatory intervention, channel distribution, integration of technology with operations and strategy, securities markets, legal risk and geopolitical macroeconomic shocks.
Detailing the risk posed by climate change, the firm said it was "surprising that this risk, which is typically viewed as a long-term issue, would be identified as the greatest strategic threat for the insurance industry in 2008."
Peter Porrino, global director of insurance and industry services, said in an introduction to the report that in order to identify risks Ernst & Young spoke with global industry leaders and with sector experts from more than 20 disciplines that shape the industry environment.
Regarding climate change, the company said that in addition to windstorms, floods and heat waves, climate change can lead to broader and more gradual consequences including: increases in mortality and health problems, the spread of environmentally related litigation, political risk linked to conflicts for control of resources, and effects on capital markets."
Concerning demographic shift, the report noted that the segment of the overall population that is over age 60 is expected to increase from 20 percent in 2005 to 33 percent in 2050.
As this group reaches retirement age, their financial needs will change and they will look for products to fill the gap, the firm said, and advised that current generations may not have sufficient funds to sustain their lifestyles or provide the income stream for post retirement that they anticipated.
The penetration of emerging markets, according to the study is both a risk and an opportunity for insurers. It noted concern about competitive threats that could displace "today's leading global players."
Regulatory intervention poses a risk because new developments and increased scrutiny could lead to changes in operations and underwriting practices. Intervention driven by political factors could become a serious risk and incidents where insurance companies receive unfavorable press coverage can impact the whole industry, Ernst & Young said.
Channel distribution is a risk because technology has changed the way insurance services are sold and Internet disintermediation has become a major risk for insurers. Companies with multi-channel access for sales and information may have competitive advantages, according to the report.
The Ernst &Young study said a further technology-related risk is the lack of integration at a strategic business level. Insurers need to view technology as an enabler to keep pace with the competition, the firm advised.
Another risk comes from the increasing pressures from securities markets, which could have serious consequences if not monitored closely, the report said.
It also found risk from legal uncertainties over liability, reform of the litigation system and similar issues that it said could threaten a company's standing or result in financial loss.
The potential for geopolitical or macroeconomic shocks was called "a major industry risk." Ernst & Young said that while many disagree on their likely cause, there is a general concern about the threat of a financial meltdown resulting from derivatives and hedge funds.
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