Insurance Executives Turn Pessimistic Over Business Outlook: Survey

November 10, 2011

Many U.S. insurance executives believe that business conditions have worsened compared to a year ago. Faced with continuing economic sluggishness and a changing regulatory environment, they remain guarded about their company’s performance and the industry’s ability to generate underwriting profit, according to a survey by KPMG LLP, the audit, tax and advisory firm.

At KPMG’s annual Insurance Industry Conference, more than a third (36 percent) of the 350 executives surveyed said that business conditions for the insurance sector have worsened compared to a year ago. This finding reflects a turnaround in executive perception compared to last year’s survey, when more than half (51 percent) said conditions had improved from 2009 to 2010.

In addition, many do not anticipate much brighter prospects in the next 18 to 24 months, as 28 percent predict another downturn/double dip before the economy begins to significantly recover, and 58 percent believe the recovery will not occur until 2013 or later.

Facing this economic environment, only 31 percent of insurance execs surveyed expect their company to perform above expectations next year – a decline of 10 percent compared with 2010 KPMG survey results. Twenty-four percent expect to perform below expectations – up from 19 percent in 2010.

Furthermore, executives told KPMG that improving underwriting profit may be challenging in the next three years. In fact, nearly four in ten executives (39 percent) characterized the chance of increased underwriting profit as “weak” – up from 33 percent last year. Only two percent expect strong profitability, down from four percent in 2010.

“The industry is in a precarious situation,” said Laura Hay, national leader of KPMG’s U.S. insurance practice. “These companies are challenged with the proverbial ‘perfect storm,’ including a sluggish economy, a weak pricing environment, and the inability to generate sufficient underwriting profit. ”

The KPMG survey found that insurance company executives think the most significant challenges for the industry over the next three to five years are the risk associated with adequately pricing insurance products, and risk associated with regulatory reform.

In fact, executives indicate that the potential regulatory changes that would most impact their businesses are “shifting capital requirements,”,”accounting valuation and disclosure,” “convergence of insurance contract standards,” and “solvency modernization initiatives.”

“As has been the case for a number of years now, insurers continue to carry a significant amount of capital,” said Hay. “In this environment of excess capital, in order for the industry to be truly compensated for the risk that it absorbs, there needs to be an in-depth understanding of the company’s risk-adjusted rate of return to better assess capital allocation decisions on an ongoing basis.”

Attendees of the KPMG conference did agree (87 percent) that the tighter regulation of banks, including the requirement for higher capital levels, will make its way in to the current insurance regulatory model in some way, shape or form.

Despite economic and regulatory concerns, and declining optimism, executives say the top initiative from a management perspective over the next two years will be organic growth. In addition, executives indicate that organic growth, acquisitions/joint ventures, and the introduction of new products will be the biggest drivers of revenue growth over the next three years.

With an eye toward growth, executives indicate that the top three areas in which they expect their companies to increase investment next year will be information technology, new products or services, and strategic acquisitions.

“Insurers are determined to find the way forward, recognizing that maintaining the status quo isn’t an option,” said Hay. “What we’ll see are firms improving operational efficiencies through technology, focusing on their core strengths, divesting of certain assets or markets that don’t fit those strengths and more aggressive M&A strategies.”

Topics Legislation Trends

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