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Concerns Over Profitability, Double-Dip Recession, Regulation Cloud Improved Insurance Industry Outlook, Says KPMG Survey

Source: KMPG


Posted on 08 Oct 2010

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The majority of U.S. insurance industry executives remain guarded about their company's performance and the industry's ability to generate underwriting profit amid continuing economic concerns and the Dodd-Frank reform package, despite wide sentiment that business conditions in the sector have improved, according to an annual industry survey conducted by KPMG LLP, the audit, tax and advisory firm.

At KPMG's 22nd annual Insurance Industry Conference more than half (51 percent) of the 300 executives surveyed say that those business conditions most relevant to their businesses have improved, while 28 percent indicate conditions are the same and 20 percent say they are worse.  However, many do not anticipate much brighter prospects ahead, as 22 percent predict another downturn/double dip before the economy begins to significantly recover, and 64 percent believe the recovery will not occur until 2012 or later.

Facing this economic environment, only 41 percent of execs surveyed expect their company to perform above expectations next year – a decline of eight percent compared with 2009 KPMG survey results.  Nineteen percent expect to perform below expectations.

Furthermore, executives continue to tell KPMG that improving underwriting profit may be challenging in the next three years.  In fact, 62 percent see only a moderate ability to increase underwriting profit, while more than one-third (34 percent) characterized the chance of increased profit as "weak."

"The KPMG survey findings reflect an expectation that many of the challenges insurance executives have faced in terms of financial performance over these past two years will likely persist," said Scott Marcello, KPMG's National Leader for Financial Services and Insurance Sector Leader.  "In addition to the economic challenges, executives have clearly told us that regulatory changes, including the recently passed Dodd-Frank reform package, add to the complexity of the landscape they must navigate."

Mixed Views on Dodd-Frank

The KPMG survey found that opinions around the Dodd-Frank package and the ramifications it will have on the industry are mixed.  When asked about the reform package which established a Federal Insurance Office (FIO) and increases the federal government's role in addressing insurance-related issues, the majority (53 percent) said their company supports the move as long as it is not redundant with state regulation.  A quarter of executives said their company completely opposes the FIO because the state-regulated insurance system works well, and there is no need for federal oversight.  Twenty-two percent said they had not yet formulated an opinion.

Attendees of the KPMG conference did agree (82 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.

"As expected, our survey indicates that executives aren't sure as to the implications Dodd-Frank will have on insurance company operations," said Marcello.  "Fifteen percent say minimal, while 24 percent say significant or severe.  While the direct impact of Dodd-Frank on many insurers is expected to be quite limited, there is the potential for a variety of indirect implications resulting from activities of the newly formed FIO and Consumer Financial Protection Bureau, as well as other provisions in the Act.  It is clearly understandable that it will take some time to understand the full range of ramifications for the insurance industry."

Risks

When asked to identify the most significant challenges they face in the next three to five years, 44 percent of respondents cited the risk associated with adequately pricing insurance products (referred to as pricing risk) to be the most significant, followed by regulatory/market conduct risk.  Interestingly, only nine percent of respondents indicated credit risk, which is a significant drop from 23 percent in 2009 and 32 percent in 2008.

"There are clear concerns surrounding pricing in this soft P&C insurance market," added Marcello.  "And, there appear to be indications that this market will persist over the nearer-term."

Other key findings:

  • If accessing additional capital this year, 30 percent said the primary source was debt, 11 percent said reinsurance.  Almost half (48 percent) said their company did not access additional capital in 2010.
  • 68 percent expect M&A to increase compared with the past 12 months.
  • Distribution (17 percent), product innovation (15 percent) and underwriting (15 percent) are seen as most important for fueling future growth.
KPMG LLP, the audit, tax and advisory firm, conducted the real-time survey of 300 senior executives at its 22nd Annual Insurance Industry Conference held at the Marriott at Brooklyn Bridge in Brooklyn, N.Y., on September 21st and 22nd.


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