Global warming is finally being recognized as a most serious problem and one that will have many ramifications. One area of concern involves the insurance industry. Potential climate change is said to be the greatest strategic risk currently facing the property/casualty insurance industry, with demographic changes taking priority for the life insurance industry. This is according to a new study by Ernst & Young. Climate change is closely followed by demographic change and catastrophic events among the top ten risks for insurers. According to the Ernst & Young study, “Strategic Business Risk 2008,” the top ten risks are:
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 told Ernst & Young these are the strategic risks that industry leaders must manage if they are to maintain dominant competitive positions, raising questions about how these risks will change what companies offer customers, the way they offer services, and where.
The analysts also identified five emerging risks, just outside the top ten, 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. Peter Porrino, global director of Insurance Services at Ernst & Young, made these comments:
As the insurance environment becomes more complex, companies need to shift from traditional risk management approaches to integrated processes that add greater value. Understanding how to respond to current trends is paramount for insurers as they seek to manage risk, optimize performance, and increase operational effectiveness. 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.
It was noted that the top ten list demonstrates that change is constant. Interestingly, climate change wouldn’t have registered on a risk list ten years ago. Persons in the industry who deal with risk management will have to deal with reality, and that will include dealing with risks that weren’t a problem in years past. Climate change will bring about a new set of risk issues that the insurance industry – as well as governments at every level – will have to deal with. Hopefully, the insurance industry will be better prepared than the Bush Administration has been in dealing with this issue. At least the industry recognizes that there is a problem.
Source: Insurance Journal
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