Posted on 23 Sep 2009
Insurance executives see their companies performing above general market expectations in 2010, but their outlook on the industry's ability to generate underwriting profit in the next one to three years remains restrained, according to an annual survey conducted by KPMG, the audit, tax and advisory firm.
At KPMG's 21st annual Insurance Industry Conference held in Brooklyn, NY, nearly half (48 percent) of the 271 executives surveyed expect their company to perform ahead of expectations in the year ahead. This represents a much more bullish outlook than the results of KPMG's 2008 survey, when only 22 percent saw performance being better than expected. Another 36 percent of this year's attendees thought their companies would perform at a level similar to 2009; just 16 percent said they see company performance being below expectations.
Despite the optimism around their company's performance, executives continue to indicate that underwriting profit may be elusive in the next three years. In fact, 64 percent see only a moderate ability to increase underwriting profit, while more than a quarter (27 percent) characterized the chance of increased profit as "weak."
"The period of the past 18-24 months has been very challenging for many insurers in terms of financial performance," said Scott Marcello, partner, Insurance Industry Leader at KPMG LLP. "While our survey shows some optimism related to future performance, executives have clearly indicated that the industry still faces many risks and the uncertain economic and regulatory environment poses many obstacles to growth and recovery."
Barriers and Challenges
According to the KPMG survey, insurance executives most frequently cited continued unemployment rates and increasing regulatory intervention as barriers to economic recovery. And while nearly a third (31 percent) of executives indicate they don't anticipate their company will need to access additional capital over the next 18 months, the scarcity and high cost of capital was cited as the third largest barrier to overall economic recovery. In the event their company did decide to access additional capital over the next 18 months, 22 percent said the most likely source would be equity while 17 percent said it would be debt.
Interestingly, despite the challenges surrounding access to capital, 73 percent of executives say they expect an increase in mergers and acquisitions when compared to the last 12 months.
When asked to identify the most significant challenges they face in the next three to five years, 30 percent of respondents cited the risk associated with adequately pricing insurance products (referred to as pricing risk) to be the most significant challenge over the next three to five years, followed closely by credit risk, identified by 23 percent of the respondents.
"As expected, there are clear concerns surrounding access to capital and the proposed regulatory changes," added Marcello. "However, there appears to be a multitude of opinions on exactly what the best regulatory solution might be for the industry."
When asked about their organization's view around the ongoing debate of financial regulation, executives offered mixed opinions as to the best plan. Twenty-eight percent of executives support an optional change to a federal regulator, 25 percent opt to maintain the current state regulatory system but say some increase in regulation will be necessary, and 17 percent support a mandatory change to a federal insurance regulator. Twenty-five percent do not support any change, and say increased regulation is not needed in the insurance industry.
Other key findings:
-- Product innovation (17%), customer focus (15%) and redeploying capital (14%) seen as most important for fueling future growth. -- 45 percent of execs say their company has made changes to both their risk management processes and their risk appetite/tolerance as a result of the global financial crisis.
KPMG LLP, the audit, tax and advisory firm, conducted the real-time survey of 271 senior executives at its 21st Annual Insurance Industry Conference held at the Marriott at Brooklyn Bridge in Brooklyn, NY, on September 22nd and 23rd.
About KPMG LLP
KPMG LLP, the audit, tax, and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International's member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.
The views and opinions expressed in the survey results are based on the responses of the survey participants and do not necessarily represent the views or professional advice of KPMG LLP.