English Appendix
STRATEGIC CHALLENGES IN THE INSURANCE WORLD
Manage Risks, Broaden Markets, Update Regulations
The International Association for the Study of Insurance Economics,
better known as the «Geneva Association», was founded in February
1973 to favour the progress of insurance by means of an objective
analysis of its interdependence with economics.
PATRICK M. LIEDTKE
The Geneva Association
www.genevaassociation.org
ENGINES OF CHANGE
A CHANGEFUL SCENARIO
In recent years the insurance industry has been affected by a series of far-reaching developments, most of which are bound not only to continue but even to pick up intensity in the medium and long term.This also has an impact on the way the insurance sector is organised.
There are five main driving forces behind this change:
- Globalisation and market convergence
- Internationalisation of regulation
- Increasing debate between public and private sectors
- Incursion of other operators
- Declining rate of population increase, especially in Spain.
DECLINING RATE OF POPULATION INCREASE
This worrying issue is particularly telling in
Spain. Spain has one of the lowest fertility rates in
Europe and the world and also has a very high
immigration rate of people who, in general, make up a
«human capital» that is considerably less skilled and
qualified than the native population in terms of
training, diplomas and degrees, etc..The Spanish
Statistics Institute (Instituto Nacional de Estadística)
has mooted two possible scenarios for population
growth in the first half of this century, which can be
summed up as follows:
- Scenario 1: Spain’s population will grow to 53 million by 2050 (falling thereafter), with a total of 19 million immigrants by the same year
- Scenario 2: Spain’s population will grow to 46 million by 2025 (falling thereafter), with a total of 7.5 million immigrants by the same year.
Both scenarios assume a growth in the fertility rate from 1.26 in 2002 to 1.51 by 2016. In 2006 the fertility rate was 1.37. But it is worthy of note here that this growth was fuelled by the 16.5% of births by non-Spanish mothers.
THE HUMAN FACTOR
This situation begs two questions. How can we assure social stability? How can we ensure the necessary human capital for the future of Spanish firms?
Human capital is the most important factor for the development of a modern economy, especially when it is fairly resource-poor, like Spain. Faced with a falling rate of population increase and unskilled immigration, the teaching sector is duty bound to respond to new challenges.As well as educating youngsters there is likely to be a strong trend towards continuous training policies and syllabi for executives. More flexibility is called for in the education system to ensure the best blend of work and study throughout the whole professional life.
To this must be added the obligation of quickly and rapidly assimilating people with very different education levels, many of whom come from other cultures and speak other languages.We must also come to terms with the fact that, although Spanish is one of the world’s most widely spoken languages, English is the lingua franca par excellence in the academic, professional and business world.The new generation of academic leaders and executives can ill afford to ignore this fact.
GLOBALISATION AND MARKET CONVERGENCE
TO DEAL WITH RISKS IS TO DEAL WITH GLOBALISATION
The globalisation of the major insurance operators and their growing convergence with other financial sectors, particularly banking, poses some key challenges:
- the insurance concentration process and the appearance of international companies
- closer relations and integration with worldwide financial markets
- appearance of similar risks throughout the whole world and growing importance of the control of exposure to systematic risks (e.g., natural catastrophes, pollution and global warming)
- multiplication of world clients seeking international (coherent and functional) solutions for their international problems
- closer organisation and cooperation with states in the framework of supranational bodies
- creation of more international bodies projecting civil ideas and regional convictions onto the international stage.
This trend has brought about a pressing need for
cooperation on a new, more global level and for
wider-ranging debates between a larger number of
operators with different local markets and divergent
strategies, but increasingly sharing the same problems.
As the industry is progressively globalised, the market-defining bodies are following suit. Insurance therefore stands in need of international institutions and partners more in tune with the globalising trend. There is also a need for suitable risk-handling and - identification tools to confront evermore complex and interdependent hazards on a worldwide scale.
INTERNATIONALISATION OF INSURANCE REGULATION
On an international level the regulation and supervision bodies have begun to communicate with each other in the interests of coordinating their actions.The International Association of Insurance Supervisors (IAIS) has therefore come into its own in recent years. Insurance regulators are also working more closely with other bodies and international organisations to lay down guidelines for the finance sector, with the aim of promoting conditions of greater transparency and financial stability.
There is no doubt that the worldwide insurance industry needs to coordinate its efforts and discuss what is going on in the insurance sector and the issues affecting insurance regulation and supervision, not only within the industry itself but also within a growing fold of social, financial and political groups.
INCREASE OF THE PUBLIC/PRIVATE DEBATE
The division of activities between the public and private sphere has been a hot topic of discussion ever since the advent of modern society and its economic system.Over the last two centuries stateinterventionism and laissez-faire deregulation have fought a continual tug of war without anyone coming up with the ideal recipe for the development of society.
In recent years issues impinging directly on the insurance industry have come to the fore, especially the organisation of the modern welfare state and the insurability of large-scale, systematic and/or hard-toforesee risks like natural catastrophes or terrorism. These risks call for active participation from insurance companies and also state involvement.The insurance industry has to define its role and find a modus operandi for operating with certain forms of risks jointly with public solutions or as a complement thereto.
The key question here would be which risks could be efficiently organised in the market and which need state participation, whether directly or indirectly. In cases such as post 11-S terrorism and air pollution the jury is still out about whether the insurance market could cope with potentially cataclysmic losses.
INCURSION OF OTHER OPERATORS
Other operators frequently find in the insurance sector a rich vein to mine.This applies especially in the life-insurance sector and wherever there are relatively simple coverages that can be marketed as standardised products.
These operators tap into several potential advantages, such as solid distribution channels or a possible regulatory arbitration in insurance legislation and the legislation applied to other companies. In general, the new market entrants have no problems stemming from old IT technology and stymieing contracts, and this represents an additional advantage. And finally, the transfer of a powerful, well-known brand, perhaps benefiting also from a business complement, might convince executives from other sectors to move into the insurance-product distribution market.
BROADEN MARKETS
Those who think that markets can be broadened simply by increasing sales of the same products year after year are making a big mistake. Boosting the sales of existing products may bring about market growth for some time, but, as we all well know, it is the new products and different solutions that really create new markets. New markets need to be broken into with existing solutions, without ceasing to organise a process of true innovation. Spanish insurance (and banking) leaders are well aware of this and they have been able to trim their sales to new, sometimes very different local markets, phasing in their own ideas and cutting-edge technology. Latin America is a fine example of this.
Furthermore, insurable limits can still be pushed back further.There are possibilities of converting currently uninsurable risks into insurable ones.The insurance industry is once more in danger of missing the boat. If it does not take the lead in developing new products and alternative solutions, it will not properly harness the existing growth potential.
THE NEW FRAMEWORK
Two fundamental advances now underway will have a telling effect on the competitive framework of insurance: the introduction of the IFRS accounting norms , closely bound up with the definition of the way we communicate with financial markets; and «Solvency II», i.e., how we understand insurance operations and the management thereof. Nonetheless not everyone has fully cottoned on to the scope of the reforms currently underway.
The current trend of the IFRS standards and Solvency II will have a big impact not only in Europe but also, in time, in the rest of the world. At the moment these two projects are either Europe born, like Solvency II, and are closely linked to European markets, in the case of IFRS. Nonetheless, many emerging markets (including China and India) plan to adopt IFRS and Solvency II if they prove their mettle. If the IASB – FASB convergence project is approved by the EU and the US Security and Exchange Commission (SEC), this will gradually lead to the adoption of global financial information standards.
In time Solvency II will have an international impact both in emerging and developed markets (including the USA and Japan). In insurance it will be the only risk-based capital system designed to be consistent with the Basel II International Convergence of Capital Measurement and Capital Standards: a Revised Framework, commonly called Basel II and perfectly familiar to Spanish businessmen. The Basel Committee on Banking Supervision and the Finance Ministers of G10 has come out in favour of a more standardised global regulation architecture, taking in all the finance service sectors.
On general lines it is thought that the preference for Solvency II will be based on IFRS standards:
- Assets will be shown mainly at market value – Liabilities probably at coherent market values
- The income statement is unlikely to be based totally on fair market values
- Unrealised profit and loss (real and accounting «noise») will probably be reported in a new integral income statement.
Like all far-reaching changes of the legal framework, these projects will have market winners and losers: for the industry as a whole the impact on capital cost will determine its competitiveness in capital markets and could improve or worsen its position vis-à-vis other finance service providers. Furthermore there are groups of companies that share certain dichotomies: big versus small; mutual insurance companies versus limited-liability companies; multiline versus specialised insurance; and geographically diversified versus concentrated. Some of them will be favoured. And as in many other cases, there are bound to be exceptions for some special groups.
FINAL THOUGHTS
The insurance world is undergoing constant changes but at the same time it also forms the core of our economy.The capacity of identifying diverse risks and organising solutions allowing individuals, private companies and public bodies and the public at large to live with these risks, is a sine qua non for the development of any modern economy.All of us stakeholders in the insurance business have to come up with answers to the following fundamental questions:
What will be the future role of the insurance industry? Which risks will or could the insurance industry cope with? We need to provide these answers with a long term view, as befits insurers, in view of the transcendent role of insurance in modern society.This will be no easy matter.
THE GENEVA ASSOCIATION AND THE EVOLUTION OF INSURANCE
The International Association for the Study of Insurance Economics, better known as the «Geneva Association», was founded in February 1973 to favour the progress of insurance by means of an objective analysis of its interdependence with economics. The Constitutive Assembly of this think-tank was held in Paris on 27 February 1973 with the participation of the leaders of European insurance.Today it has 80 members (the maximum number allowed by its statutes) spread around the five continents -Europe, South and North America, Asia, Africa and Australia. All of them are CEOs of the world’s biggest insurance companies, who join the association on a personal basis.
The Geneva Association is based in Geneva, Switzerland.As well as its permanent twenty-strong staff it has a worldwide network of regular collaborators, all working in research. It can also turn to 300 or 400 experts in various fields related to insurance and risk management and has established over 10,000 contacts around the world in the last three decades.
The Geneva Association aims to give a detailed analysis of the microeconomic issues, analysing insurers’ interactions with the their clients’ risk-management problems in all sectors, while also looking at the wider macroeconomic picture of uncertainties in the worldwide economy. For over three decades now the Geneva Association has worked unstintingly in pursuit of these two overriding goals, producing research activities of different types in both areas.
It has also assigned or negotiated a host of research projects, established the prestigious Ernst-Meyer Prize and other grant schemes, organised hundreds of lectures by its executives and set up in Geneva a specialised library on insurance economy, uncertainty and risk, which researchers may use free of charge.Through its website www.genevaassociation.org and the websites of the four affiliated organisations, the Geneva Association offers a first-rate information source on all its activities.
In sum the Geneva Association:
- Researches the growing importance of worldwide insurance activities
- Pinpoints fundamental insurance-related trends and strategic issues
- Develops and encourages various initiatives concerning the evolution in economic and cultural terms of insurance, risk management and the notion of uncertainty in the modern economy
- Organises, co-organises and sponsors conferences, seminars and lectures
- Publishes various newssheets, the Geneva Papers and special books and reports.