Credit crunch is "biggest risk"

The impact of the credit crunch on investments have leapfrogged traditional worries to become the biggest risks to insurers, warns the Banana Skins in Insurance report by PWC for the Centre for the Study of Financial Innovation (CSFI).

The top three risks (and their 2007 rankings) are:

• Investment performance (11)
• Equity markets (13)
• Capital availability (26)

Report author David Lascelles said: “The insurance sector feels that it may be unjustly penalised for the sins of the banking sector.”

Andrew Hilton, CSFI director warned of:

• low or negative investment returns;
• an acute shortage of capital;
• a dreadful macro-economic outlook;
• a backlash against financial complexity;
• increasing political involvement, even in mature markets; and
• the inevitability of much tougher regulation at all levels.

He said: “For the non-life sector, capacity and pricing are the big issues, along with the problems that tend to come with a macro-economic slowdown – notably a surge in claims and an increase in fraud. Plus, the industry’s problems are bound to be exacerbated by the regulatory crackdown. For the reinsurers, sustaining capacity looks like the big problem, along with management of the pricing cycle. “

And he warned: “And then, of course, there is reputational risk; insurance is at least as vulnerable here as banking.”

Compared to 2007, the percentage of respondents who said the industry was ‘well-prepared’ to meet the challenges was down from 21% to a paltry (and terrifying) 4%.