As the insurance industry manages its way through the financial downturn, its top concerns are investment returns, equity performance and access to capital, according to a new survey.

The latest Insurance Banana Skins survey, conducted by the Centre for the Study of Financial Innovation (CSFI) in association with PricewaterhouseCoopers (PwC) shows that without the stable investment returns they have depended upon, insurance companies are facing a challenging future in what is proving to be the worst business crisis in decades.

The survey shows how respondents rank the risks facing the insurance industry. High on the list is the macro-economic outlook and its impact on the insurance industry. Lower business volumes are expected to put strains on profitability and capital in many parts of the world.

Also up sharply from the previous survey is the quality of the insurance industry’s risk management (No. 6), and its exposure to complex risk instruments such as credit default swaps (No. 8). Managing costs has also ranked in the top 15 this year, whereas in 2007, it didn’t even make the list.

The survey also shows that the industry is seen to be less prepared to handle risk than it was in 2007. Only 4% of respondents thought that insurance companies were prepared versus 21% in 2007.

Although concern about too much regulation has slipped down the rankings, it remains a key issue in all major markets; respondents are concerned that there will be a regulatory crackdown in the wake of the credit crunch. Insurance executives are also anxious that the industry will be made to share the cost for what they perceive as a banking crisis.

Concern about the quality of management in the insurance industry, which featured strongly in 2007, has also slipped down the list, from number three to number 13 — overtaken by more urgent risks.

There was a sharp fall in concerns over environmental-type risks. For example, natural catastrophes and climate change which were in the top ten in 2007 are now ranked in the 20s. This is partly because there have been fewer major events, but also because the industry sees more immediate risks.

“The underlying message of this survey is about crisis management,” says George Sheen Leader of the PwC Canada Financial Services Practice. “The industry is focused on their big three risks: responding to low investment returns, ensuring access to capital and managing the impact of a challenging global economy.”

Sheen continues, “This means challenging their current risk management practices and investment policies, lowering their cost base and managing their capital levels proactively.”

For the life industry, the downturn is hitting the segregated funds and variable annuity businesses. On the non-life side, the main concerns are with the outlook for premiums, and a possible surge in claims, including those motivated by fraud. Concerns in the reinsurance industry are mainly with the security of capacity in a difficult market.

The survey was conducted in November and December 2008 and is based on 403 responses from 39 countries.

Three quarters of the respondents this year were insurance executives, many in senior positions or at board level.

The CSFI is a non-profit think-tank, founded in 1993, which looks at challenges to and opportunities for the financial sector.

IE