Regulation and Risk – can they really deliver a competitive edge?

How risk management and regulation can help drive the future health and growth of the industry has been the theme of the afternoon session of the Ernst & Young Global Insurance Conference in Paris.

The audience was clear that the improved business integration of risk management was the most significant change to recent management practices since the financial crisis, with 44% flagging this up in the electronic poll. But how did the experts see it?

Tim Harris, Deputy Group CFO of Aviva, was clear that risk management could be a driver of performance but there had to be a balance between the right kind of risk and no risk at all – hitting the “sweet spot” as he described it. He urged the industry to continue to take calculated risk for the benefit of consumers and the business alike – “it’s what we do and have always done,” he stressed. The key is just getting better at it – “it’s all about implementation”.

However, Antoine Lissowski of CNP Assurances raised concerns that the new rules on risk were so complex that management of the business and those charged with oversight like audit committees would struggle to understand what they were looking at.

Kevin Griffith of Ernst & Young, in true accounting style, asked if Regulation is an Inhibitor or Enabler of growth and gave a perfectly balanced answer! On the one hand more unwanted change, high costs and lack of resources and systems at breaking point were all inhibitors of growth for the industry. In contrast, Kevin argued that a single global standard for the industry, convergence in reporting and the opportunity to reshape the finance function to allow the CFO to add real value to the organisation were significant enablers of growth.

Insurance is undoubtedly a complex business and the ever increasing demands of regulation and risk management are making it no less easy to understand for the layman as for the non executive director. But there are a lot of positives for the industry to take forward from the crisis.

The damage done to the industry during the crisis was much less than the impact on the banks, and indeed the one notable insurer failure, AIG, was largely due to practices that were closer to banking than insurance, noted Munich Re’s Joachim Oechlin. He also noted that the industry had eventually survived the crisis relatively unharmed.

If there was a lesson to be learned from the crisis, the conference delegates seem to suggest it was that building risk management into the fabric of the business is the best way to protect themselves and their customers. As Tim Harris commented, the “key is driving explicit optimised performance decisions”, keeping the connection between the customer and the commercial aspects of the business clearly in focus. If risk management is applied properly it can do just that and that will give the competitive edge that everyone is seeking.

Growth has to be the goal!

Laura Santori from Standard & Poor’s Europe set the tone for the morning session of the Ernst & Young Global Insurance Conference in Paris today. She warned that insurers have two issues to concentrate on in the coming years – dealing with the demands of Solvency II and … going for growth.

Santori pointed out that the insurance industry had weathered the global crisis better than some sectors of the economy, indeed 97% of the publicly rated insurers were still at investment grades, but she warned they could not relax as there are still big threats to be overcome. In her words “insurers are at a crossroads”. Faced with the threat from a prolonged period of slow economic growth where, she asked, was the necessary growth going to come from?

Well, the audience of senior industry figures seemed pretty sure where it was going to get its growth from. An instant electronic poll showed a third of the audience was focusing growth strategies around expanded distribution channels and another third was focusing on new product expansion. One in five, however, was saying that growth was going to come from emerging markets. Growth through M&A was the least likely option to be pursued – partly as lack of investment funding had effectively paralysed European-led M&A activity according to Morgan Stanley’s Chris Kaladeen.

The focus of discussions then moved to how you can make the emerging markets work for you and the consensus among panellists seemed to be that China and India are so huge you have to be there whatever the difficulties. But new growth markets in SE Asia are appearing, and Central and Eastern Europe remains a key market. Liberty International had been early into Latin America but late into CEE and had found the competitive environment already much harder.

So if growth is essential and expanding in Emerging Markets is a vital strategic opportunity for many insurers, what should they do and what should they avoid?

The critical success factors were listed as:
• Develop good relationships with local regulators before entering into any M&A or JV activity in each market, and remember each is different
• Try to gain equal access and treatment to local players, although you can’t as yet in the power markets of China and India
• Execution is critical – do what you do as well as possible, don’t cut corners, don’t assume you know best, transfer knowledge
• Get the best people – your partners, those who manage the business and those who do the work – pass on knowledge, train people and put the business fundamentals in place so they and you can see what is happening
• Gain critical mass as fast as possible, with agreed timelines and metrics to make sure you stay on track
• Be patient

And what to avoid?
• Don’t forget to do your due diligence on your distribution channels
• Don’t try to spread the same corporate gospel everywhere you go – these markets are different and you need to realise that
• Don’t work with bad people
• Don’t be impatient!

Ernst & Young Global Insurance Conference, Paris, 18 May 2010

We are attending this major industry event today and will be posting conference reports here throughout the day. We will also be giving updates on www.twitter.com/pendrywhite and further updates via Linkedin