Insurance risks in the new world order
The insurance sector plays an important role in pricing risk to enable businesses to carry on with their activities. However, in the era of the pandemic, the global insurance industry is facing many challenges, besides COVID-19 issues. Among the risks faced by the insurance sector, cybercrime presents the greatest threat. It includes the ability of hackers to attack insurer IT systems directly and the costs of underwriting cyberattacks against their policyholders. The increasing sophistication of these cyberattacks — some by alleged statesponsored actors — has increased, as well as their potential consequences, given the insurance industry’s dependence on IT services and infrastructure data.
Another fast-emerging insurance risk relates to climate change, especially in areas prone to catastrophic weather changes, with insurance premiums rising and client deductibles also increasing.
The insurance sector, like others in the financial sector, faces problems in that the wider implications of climate change are often difficult or impossible to predict, and thus price into the premiums. The insurance sector thrives on an element of predictability, and unpredictability is anathema to an industry that likes to work on past probabilities.
Another risk is regulation oversight, due to the growing volume of insurance and re-insurance rules, with complaints from the industry that some of these regulations are increasingly serving as impediments to some needed industry changes, with increased costs to the sector in implementing regulatory changes.
While higher levels of regulation might be a concern to some industries, others feel that stronger regulatory oversight and better industry controls for improving standards over the decades has helped the sector.
In Saudi Arabia, the insurance sector is regulated by the Saudi Central Bank,
SAMA, which has also issued the FIB Rule for Licensing and Supervision of Foreign Insurance and Reinsurance companies in the Kingdom to support local companies and create a well-regulated Saudi insurance hub. Today, there are about 30 insurance companies, 84 brokers, almost 60 insurance agents and nine reinsurance companies operating, including some of the best-known international names such as BUPA, Marsh, Allianz, Axa, Aon, Ace and Chubb, to name but a few attracted to the growing Saudi insurance market. Health insurance in particular has been a growing line of business and has accelerated during the pandemic, as have government regulations for mandatory health cover for all workers, both in the private and public sectors.
Gross written premiums have gone up from SR21.4 billion ($5.7 billion) in 2014 to SR38.8 billion in 2020, with health insurance accounting for about 59 percent of gross premiums in 2020.
To reduce Saudi insurance industry risk, SAMA has introduced tougher rules regarding minimal capital reserves to ensure financial solvency and encourage mergers and acquisitions, given the large and fragmented nature of the Saudi insurance sector, so as to create stronger companies capable of serving Saudi Vision 2030 projects, which had attracted the offshore insurance sector to serve the lucrative Saudi market.
As such, capital requirements for Saudi insurers are projected to increase from a minimum of SR100 million to SR500 million, and capital requirements for re-insurers to increase from a minimum of SR200 million to SR1 billion.
But risks remain to the industry. Other risk areas are the fast pace of industry automation and digitalization, with some of the smaller, less connected insurance players affected the most, unlike those with international joint venture partners, which have access to advanced automation and digitalization systems.
Looking at the above risks, the ongoing COVID-19 pandemic and new variants like omicron, there are plenty of concerns for the insurance sector. Great uncertainty still remains over the pandemic’s medium-term effects, including the impacts of long COVID19, sluggish economic performance, business failures and insurance payouts. Adding climate and cybersecurity to the problems faced by insurers illustrates the magnitude of their problem and raises the question of whether some are poorly prepared to meet these new challenges due to data shortages, an inability to aggregate events and assess the impact of second-order consequences, for in the final analysis, the importance of insurance is mainly trying to assess probability outcome consequences to price their premiums. The industry, like others in the financial sector, does a lot of its preparation for potential risks, but as in life and the real world, the risks that do hit us all the hardest are the ones that we often either overlook or cannot prepare for.