Slump in returns heads insurers’ list of concerns

Insurers have radically changed their priorities over the last year, as they focus on survival amid a deepening global recession and plunging asset prices.

The industry is gripped by fears of slumping investment returns, shrinking profits and pressure on capital, the Centre for the Study of Financial Innovation (CSFI) survey has revealed. Achieving enough investment returns to protect capital is the top concern for an industry battered by falling equity and property markets and rising corporate bond defaults.

The previous survey, in mid-2007, placed investment returns at number 11, with macroeconomic conditions, now fourth, not even registering.

David Lascelles of CSFI, the survey's editor, said: “Last time the risks were seen as more operational; this time they are focused on vital risks like financial strength and profitability and their ability to get through this crisis in one piece.

“Across all geographic regions the main preoccupations are the same, which tells us this is a global crisis – no part of the world is escaping this.”

The dire state of equity markets is now the second-biggest concern, with risk management and complex financial instruments also jumping into the top 10 worries. Longer-term concerns such as climate change, management quality and governance have dropped out of the top 10 as the industry seeks to protect itself against the crisis.

The industry has relied on steady investment returns for years, with general insurers now particularly exposed because they need to make returns from investing premiums to produce a profit. Lower business volumes are also expected to put strains on profitability and capital in many parts of the world.

The sharp shift in priorities indicates that insurers, like banks, became too complacent about the dangers to their businesses during the long period of rising markets and economic growth.

Andrew Kail, UK insurance leader at PwC, said: “If you get a risk like capital that was at [number] 26 and is now number three, what were they doing two years ago to manage that risk?”

Concern about too much regulation, previously the top concern, has slipped to number six, but remains a big issue in all the major markets, mainly because of concern about a regulatory crackdown. Shares of UK insurers, including Legal & General, have been hit in recent weeks, partly on concerns that the regulator would judge them to be short of capital.