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Risk managers should prepare for more mergers, new exposures in 2016

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While the U.S. Federal Reserve in December raised interest rates for the first time in nearly a decade, 2016 will remain a challenge for the insurance industry.

Low interest rates are often cited as a challenge for insurers' bottom lines, and the rate hike, a 0.25 percentage point increase that the Federal Open Markets Committee approved last week, should help at least somewhat.

“Property and casualty insurers hope to take advantage of Fed interest rate hikes to grow investment income,” Robert Hartwig, president of the Insurance Information Institute Inc. in New York, said in an email.

M&As

“Continued merger and acquisition activity” will be a main issue for the insurance industry in 2016, said Howard Mills, global insurance regulatory leader at consulting firm Deloitte L.L.P. in New York in an email.

The sector saw its largest-ever proposed acquisition in 2015 as insurer Ace Ltd. offered $28.3 billion for Chubb Corp. in a deal set to be finalized in 2016.

Among brokers, 2016 is when Willis Group Holdings P.L.C. and Towers Watson & Co. are to wrap their $18 billion merger, which won approval in mid-December despite some strong shareholder opposition.

“I see that 2016 could surpass 2015 in deal activity,” said Timothy J. Cunningham, managing director at Chicago-based Optis Partners L.L.C.

Cyber risks

Cyber security also will be an ongoing issue for businesses and organizations to protect customer, consumer and proprietary information in 2016.

Congress last week tacked cyber security legislation onto a federal spending bill that would, among other provisions, give companies that share data with the U.S. government protection from consumer litigation.

The proposal, which has strong support from the business community, responds to major cyber attacks that have ranged from Target Corp. to Sony Pictures to governmental agencies.

“Insurers will continue to embrace new technologies like big data and data analytics to underwrite risks and insure risks at the technological cutting edge, such as cyber and gene therapy,” Mr. Hartwig said.

Drones

One risk that looks to remain in the air is drones, with hundreds of thousands of the miniature aircraft looking to be in Christmas stockings and raising issues well into the future.

In a December decision responding to concerns about the risks drones could pose near airports and elsewhere, the Federal Aviation Administration said current owners must register the craft by Feb. 19, 2016, and those who own a drone after Dec. 21, 2015, must register it before its first flight.

Alternative capital

Despite some help in investment income due to the Fed's interest rate hike, premiums, particularly in the reinsurance sector, will remain under pressure from alternative capital in 2016.

Insurance-linked securities, better known as catastrophe bonds, are projected to grow to $120 billion to $150 billion by 2018, according to Aon Benfield Securities.

Regulation

“International regulatory issues such as insurance capital standards, higher loss absorbency requirements and global systemically important insurer designations and their impact on U.S. regulators and, thus, U.S. industry” will be a major focus for 2016, Mr. Mills said.

The coming year also includes the election of the next U.S. president and, presumably changes in top regulators, which will result in “uncertainty as to the future of financial services regulation, tax policy and many other issues important to insurers,” Mr. Hartwig said.

2016 also brings the long-awaited implementation of Solvency II, Europe's capital rules for insurers located in and doing business in Europe.

Class actions

While the Supreme Court added some clarity in 2015 on the longtime business concern of class action litigation, it will issue another ruling on the subject in 2016.

In December, the U.S. Supreme Court backed DirecTV Inc.'s effort to enforce arbitration agreements signed by its satellite television customers in California. On a 6-3 vote, the high court overturned a California appellate court ruling that consumers were not bound by a provision in the AT&T Inc. unit's customer agreement that prevents disputes from being resolved on a classwide basis. The high court this year is to rule in Spokeo Inc. v. Thomas Robins, in which he seeks to file a class action against the social media site for allegedly publishing inaccurate information about him and failing to provide third parties with required notices.

Supply chain risks

While catastrophe losses were relatively light in 2015, August explosions at the China Port of Tianjin resulted in insured losses of about $3.3 billion, according to Allianz Global Corporate & Specialty S.E. Allianz also said the manmade disaster points up companies' increasing exposure to business interruption losses.

Unfinished business

Losses in the Tianjin disaster were one factor in a major drop in third-quarter profit for Zurich Insurance Group Ltd., prompting the departure of CEO Martin Senn and restructuring efforts that will continue to reshape the insurer in 2016.

American International Group Inc. may also begin the year still under siege from activist investors led by Carl Icahn — even after announcing it would lay off hundreds of senior managers and gaining about $750 million from selling part of its stake in China's state-run PICC Property & Casualty Co Ltd.

Talent gap

The insurance industry continues to seek talent as baby boomers retire, but a PricewaterhouseCoopers L.L.P. survey found only 4% of millennials had insurance on their work wish list.

“The ... change facing our industry is the persistent lack of younger talent entering the industry,” said Mike Sicard, chairman, president and CEO of USI Insurance Services L.L.C. in Valhalla, New York.