Breaking the cycle

The insurance sector is at a critical point, with the move to greater transparency, increased use of the capital markets, and new regulation all meaning there is great potential for change.

This is the conclusion of Kathleen Corbet, president of Standard & Poor’s. Moreover, the rating agency is cautiously optimistic about the industry’s prospects. “Having endured a period since 2001 when the direction of the insurer ratings was markedly downward, over the past year the trend has reversed,” she says.

But she poses the major question: “Will the industry seize the opportunity to enjoy an era of consistent success, stability, and security without reverting to the traditional boom and bust cycle in the market?” History suggests that the answer is an unequivocal no. The insurance sector has been blighted in the past by the severity of the cycle, which has changed in its cyclical timeframe peaks and troughs but never diminished entirely.

But Yann le Pallec, head of Standard & Poor’s European Insurance Ratings, says the signs suggest that the cycle will be less severe in the future. But even if this is the case, whether it is a revolutionary change or a slower evolutionary change remains to be seen.

An electronic poll of the audience at its European insurance symposium, Standard & Poor’s found that 65% believed it would be an evolutionary change and 7% believed it would be a revolution.

A further 27% of the audience, however, believed that the power of the cycle would remain and the industry would not change.

There is no doubt that the insurance sector has faced a revolution in terms of the way it is regulated with more radical change on-going.

And for Paul Sharma, head of the Risk Review Department at the UK Financial Services Authority, an early and successful adoption by companies of measures like Solvency II results in a strong competitive advantage.

“It would be a mistake to believe that because Solvency II implementation is still some years away, that there is plenty of time to carry out changes,” he says. “We are already seeing the regulatory environment in several countries move toward Solvency II-style measures, and those companies that are able to use internal models will have a key competitive advantage in this new environment.”

A fair warning. But is the industry listening?