There is little doubt that the financial crisis will spill over into the economy. This will have a profound effect on both sides of the balance sheet of insurers; with potential continued weakness in the credit and equity markets and unexpected changes in the behavior of the existing policyholders as well as the volume and product mix of new business.
The liquidity and credit events of the last few months are unprecedented. We have witnessed the failures of leading investment and commercial banks across North America and Europe. Insurers continue to be under significant pressure as evidenced by widening spreads on credit default swaps and falling equity valuations.
While observing spectacular failures of major banks, many insurers are continuing to take comfort in "false positives" with regard to their own risk management practices. The Deficiency List: Rethinking the risk agenda for Insurers, identifies four deficiencies with respect to the current risk management practices at many insurers:
1) Lack of an effective risk governance structure
2) "The Income Myth" of insurance land
3) Breakdown between risk appetite and management decision-making
4) Lack of robust early warning indicators and poor risk information
While insurers and banks are subject to different risk exposures and liquidity needs, recent experiences have demonstrated that the financial services industry is highly interconnected, often through complex and opaque channels. It may be too early to predict how the regulatory landscape will evolve in the coming years. However, one thing is certain: the US will see a major overhaul of the regulatory framework, and a more approach to regulation will emerge.
