Twenty-nine percent of respondents see consolidation as the leading risk they face.

The growing amount of regulation is definitely something that is on insurance executives’ minds, as The Economist Intelligence Unit’s CEO Briefing makes clear. We all know that this added scrutiny by regulators was inevitable after the excesses that provoked the 2008 financial crash, and probably (as one executive rather glumly remarks) it’s all for the best—but the costs of compliance will be high.

Solvency II is the big story in Europe, and will bring uniform capital rules and risk management systems to that region. It will likely mean that insurers will have to increase their capital bases. These new requirements will have an effect beyond the European Union, though, because many leading global insurers are domiciled there and their global subsidiaries will have to comply, and because non-EU based insurers operating there would also have to comply.

In the same vein, the drive to harmonize the rules governing the insurance industry across the globe is also making it harder (and more expensive) for firms to comply.  Certainly insurers will try to lobby to minimize the new /additional regulations being imposed on them. But at the same time, some are seeing the changes as an opportunity to improve the way they manage and run their businesses. Some of the new ways of measuring value may well be improvements over traditional GAAP (generally accepted accounting principles) methods to help insurers better understand the economic value of the various business and products they have.

Additionally, it seems as though many see these pressures, among others, as driving a trend towards consolidation of the players within what is, after all, a fairly fragmented industry. Twenty-nine percent of respondents to the survey saw it as the leading risk their company would face over the coming year.

This threat naturally brings with it considerable opportunities for insurers with an appetite for acquisitions—especially since some of the banks (like HSBC, ING and others) are reducing their global presence and selling their insurance operations in Asia and Latin America.

Most interesting to me is the observation that the cost of acquiring technology is a major pressure expected to drive consolidation. According to one source, the “table stakes for having adequate technology are going way up,” a development that is likely to favor the bigger players.

I wonder. There is obviously a tremendous incentive for insurers to invest in new technology for a number of reasons—I will return to this topic in my following blogs—but it’s arguable whether this would give the bigger companies an advantage. To be sure they have the deeper pockets, but they also have the biggest burden in terms of legacy systems and processes (not to mention mindsets). All of these last-mentioned factors will tend to make it harder for them to really benefit from the transformation that must accompany the move toward becoming a digital insurer.

More about technology when I look at the potential for growth next time.

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