czech insurance banana skins 2017 - pwc · czech republic “interest rates, guaranteed income...
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In Cooperation with
Czech Insurance Banana Skins 2017
Top Threats to Czech Insurance Industry
www.pwc.cz
Top Insurance Industry Risks
World Czech Republic
1 Change management
2 Cyber risk
3 Technology
4 Interest rates
5 Investment performance
6 Regulation
7 Macro-economy
8 Competition
9 Human talent
10 Guaranteed products
11 Political interference
12 Business practices
13 Cost reduction
14 Quality of management
15 Quality of risk management
16 Social change
17 Reputation
18 Product development
19 Corporate governance
20 Capital availability
21 Complex instruments
22 Brexit
1 Interest rates
2 Guaranteed products
3 Regulation
4 Investment performance
5 Cyber risk
6 Change management
7 Reputation
8 Technology
9 Competition
10 Macro-economy
11 Political interference
12 Cost reduction
13 Business practices
14 Product development
15 Human talent
16 Social change
17 Complex instruments
18 Quality of risk management
19 Brexit
20 Corporate governance
21 Quality of management
22 Capital availability
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Czech Republic
“Interest rates, guaranteed income products and regulations: These are the largest risks faced by the Czech insurance industry. On a global scale, the highest concerns centre around technological risks, cyber-attacks and fear of not being able to react on time to changes the industry is going through, whereas Czech companies are more concerned with local issues. I expect interest rates to go up much faster sooner than we can manage to deal with challenging regulations or guaranteed products.”
Marek Richter,PwC Audit Partner
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Czech Republic
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Czech Republic was represented by 10 respondents from the following industries:
Life insurance 4Non-life insurance 2Composite 2Others 2
The largest threats to Czech insurers were interest rates, mostly due to their longstanding low level, and the impact on those insurance products that carry guaranteed returns, and are therefore related to this issue. Among other risks were also the extent of new regulations, especially those concerning consumer protection. Risks arising from technological changes and the ability of industry to manage all the transformations involved were rated between being of medium and high concern. In comparison with other countries, Czech industries have a higher than average concern for reputation risks, which one of the respondents described as a “rather sensitive topic”, especially due to the inappropriate selling practices of commission-driven brokers. On the other hand, threats concerning macroeconomic development are much lower than the global average. Respondents perceive the European Union market as secure.
PreparednessHow well prepared is the industry to handle these risks? (1 – poorly, 5 – well)
High concerns• Reputation• Guaranteed products• Product development• Complex instruments
Global average score: 3,02Czech average score: 2,80
Less concern• Quality of management• Change management• Technology• Cyber risks• Macro-economy
Regulation: “Overprotection of customers is bad.”
Change management: “The biggest risk is not being quick and agile enough to capture new opportunities and to rapidly evolve into a model required by the new customer”.
Interest rates: “The continued low interest rate environment has significant implications for both companies and the market. [There is a] risk of losses because a major element of the portfolio still has a very significant guaranteed interest rate.”
Technology: “The risk that ineffective IT processes will have negative implications for business strategies and objectives is quite big. Obsolete core systems and applications don’t support effective development/changes required by business.”
Cyber risk: “One of the highest emerging risks, which is underestimated nowadays.”
Czech Republic
1. Interest rates
The problem of long-term low interest rates is at the top of the list of most European countries. This threat is closely connected with the risk of guaranteed products and investment performance. It seems that central banks are worried about the economy potentially overheating and, consequently, after several years, slightly increased interest rates. For insurance companies this means good news and an optimistic prospect for the future.
2. Guaranteed products
The current situation of low interest rates has a direct impact on the financial performance of products with guaranteed income. Insurance companies have to create an extensive back-up for cases of insufficiency, thus blocking their capital which could be otherwise invested in new technologies or human capital. In comparison with the world, we see the related human resources threat as the most underestimated one in the Czech Republic.
3. Regulation
The risk connected with regulations is still perceived as one of the most significant on the Czech market, even though its significance rating decreased in the last years. The amendment to the Insurance Act including the European regulation entitled Solvency 2 has been accepted and Czech insurance companies are now interested when and how these newly regulated audits will be implemented. At this moment, the expected time frame on the market is 2 to 3 years. Another issue keeping Czech insurers awake at night is the new standard of the International Financial Reporting Standards (IFRS). This newly approved standard IFRS 17, replacing IFRS 4, will become effective on 1 January 2021.
4. Investment performance
Investment opportunities for insurers are not convenient at all. After the loan crisis, financial institutions have been more intensively “forced” to invest in low-risk financial products, mainly in government bonds. This especially applies to insurance companies, as accepting insurance risk is the core of their business. It is, therefore, not surprising that, in case of negative yields on bonds, insurance companies tend to turn to investments into actives with high-yield assets such as real estate.
5. Cyber risk
Cyber risks placed as second on the global chart: Cybersecurity protection should be one of the top priorities of all financial institutions that manage the very sensitive data of their customers. Potential theft of this data would have a major impact on the insurers’ reputation and would lead to a loss of customers, fewer business trades in the future, less financial compensation to clients and more fines to regulators. Based on trends in North America and Western Europe, we expect that, in the next edition, cyber risk will place much higher in the Czech chart as well.
Top 10 Threats to Czech Insurance Industry
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6. Change management
Insurance representatives do realise that the inability to react to steps taken by competition on time, to face technological challenges, economic and political changes or customer preference changes pose a major threat. It is, therefore, not a coincidence that this risk is at the top of the global list. It is time to leave the fear of low interest rates behind and to focus on risk brought about by the fast-changing environment of the insurance sector.
7. Reputation
Czech insurers see the risk of damaging their reputation as a serious one. They learnt to use social media to communicate with their clients and they do understand the potential risks of this stream of communication. Fake news also belongs in this “damaged reputation” category, as insurers need to learn how to react to such news.
8. Technology
In today’s Tech world, technological advancement should be a priority. Outdated information systems and inefficient processes form a great obstacle in the way of attempts by insurers to reduce expenses. Technological maturity not only enables insurance companies to be economical and react to changes of the market, but also makes them a desirable employer for promising graduates.
9. Competition
The insurance sector is a global business in a highly competitive environment. Speaking of damage liability, such an environment led to long-term unprofitability of this segment, which the central bank managed to stabilise. Speaking of the advantages, a competitive environment opens new opportunities and brings major profits to end users. The “rediscovery” of the so-called P-2-P (peer-to-peer) model is perceived very positively. We will definitely hear more about companies applying this model to their product offer.
10. Macro-economy
Insurance companies face a whole range of economic as well as political risks. Czech insurance companies are more or less optimistic about local economic conditions. There is a concern about the potential overheating of the real estate market. Speaking of political risks, companies are worried about potential protectionism policies and other consumer protection interference, such as the European PRIIPs regulations.
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Contacts
Marek Richter Auditing and Financial
Services Partner
+420 602 115 [email protected]
Mike Jennings Consulting Services Partner
+420 603 280 [email protected]
Zenon Folwarczny+420 724 369 [email protected]
Martin Vurm+420 775 011 [email protected]
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PwC Česká republikaHvězdova 1734/2c140 00 Praha 4Czech Republic
Milan Petrmann+420 732 825 [email protected]
Jakub Kolář+420 734 353 [email protected]
Martin Pleška+420 737 276 [email protected]
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