KPMG Survey Says Executives Less Optimistic On Premium Growth, Industry’s Ability to Grow Margins

September 29, 2004

Even before the full impact of the recent hurricane activity is known, the majority of the 150 senior insurance executives surveyed are less optimistic about premium growth and the industry’s ability to increase margins, according to KPMG LLP. Survey results also reflected that the amount of resources needed to address Sarbanes-Oxley compliance was far greater than anticipated a year ago.

While most of the competition is still seen from domestic insurers (51 percent), survey results demonstrate that there is an expectation that competition from international financial-service companies will increase (24 percent).

KPMG LLP, the audit, tax and advisory firm, conducted the real-time survey at its 16th Annual Insurance Industry Conference held at the Hilton New York, on Sept. 27-28.

“Overall, companies are cautiously optimistic about the industry,” said Fred Donner, national sector leader for KPMG’s Insurance practice. “However, there was a significant decline in the number of executives who thought that their firm’s performance would exceed expectations. I would attribute the loss of confidence to the softening of the property and casualty market and the intense competition in the life sector.”

Only 57 percent of the executives surveyed indicated they expect their firms to perform above expectations in the next 12 months, as compared to 70 percent a year ago. The survey also found that the number of executives who indicated that the Sarbanes-Oxley Act has had the greatest impact on the way they do business, increased to 83 percent up from 58 percent last year.

Reflecting the sharpening of underwriting over the past two years, the number of executives indicating that underwriting was the most important for future growth declined to 26 percent from 32 percent a year ago, while customer and product focus both showed increases in importance for future growth.

KPMG received the following responses:

1. Over the next one to three years how do you rate the industry’s
ability to increase margins?

2002/2003/2004

Strong (22%) (11%) (0%)
Moderate (63%) (57%) (65%)
Weak (15%) (32%) (35%)

2. Which of the following risks poses the greatest threat to the
insurance industry?

2002/2003/2004

Credit (32%) (19%) (9%)
Concentration of risk (17%) (26%) (28%)
Capital deployment. (25%) (24%) (28%)
Technology (6%) (3%) (12%)
Regulatory/Market Conduct (20%) (29%) (23%)

3. Given the state of the Life & Health markets and the current economic environment, what is the outlook for premium growth?

2002/2003/2004

Increase (59%) (58%) (48%)
Decrease (18%) (11%) (17%)
Remain the same. (24%) (31%) (35%)

4. Given the state of the Property & Casualty markets and the current economic environment, what is the outlook for premium growth?

2002/2003/2004

Increase (88%) (65%) (43%)
Decrease (4%) (13%) (23%)
Remain the same. (9%) (22%) (34%)

5. Over the next three to five years who do you see as your major
competitor?

2000/2002/2003/2004

Banks. (4%) (11%) (12%) (10%)
Insurance companies. (32%) (55%) (62%) (51%)
Brokerage firm. (5%) (4%) (7%) (8%)
International financial
services companies. (53%) (21%) (15%) (24%)
New entrant to the industry. (7%) (9%) (4%) (7%)

6. Compared to the last 12 months how do you feel your firm will perform in the year ahead?

2002/2003/2004

Significantly ahead of expectations (11%) (5%) (9%)
Above expectations (48%) (65%) (48%)
The same (30%) (25%) (34%)
Significantly below expectations (11%) (5%) (8%)

7. Which areas do you feel are the most important for future growth?

2002/2003/2004

Underwriting (38%) (32%) (26%)
Technology (10%) (6%) (14%)
Customer focus (22%) (20%) (25%)
Product focus (10%) (12%) (16%)
Distribution (20%) (30%) (19%)

8. Compared to the last 12 months, will mergers and acquisitions:

2002/2003/2004

Increase (50%) (59%) (52%)
Decrease (25%) (11%) (13%)
Remain about the same (26%) (30%) (35%)

9. What recently enacted legislation will most affect the way you do business?

2003/2004

Gramm-Leach-Bliley (9%) (4%)
HIPPA (12%) (2%)
Sarbanes-Oxley (58%) (83%)
TRIA (7%) (8%)
Patriot Act (15%) (2%)

(Note: the reason categories add up to more than or less than 100 percent is that some respondents had more than one answer for each question or did not answer each question)

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