In a dramatic reversal, many U.S. insurance industry executives say business conditions in the sector have worsened compared to a year ago. Faced with continuing economic sluggishness and a rapidly evolving regulatory environment, they remain guarded about their company's performance and the industry's ability to generate underwriting profit, according to an annual industry survey conducted by KPMG LLP, the audit, tax and advisory firm.
At KPMG's 23rd Annual Insurance Industry Conference, more than a third (36 percent) of the 350 executives surveyed say that business conditions for the insurance sector have worsened compared to a year ago. This finding reflects a significant 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 continue to tell 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 industry is also faced with unprecedented regulatory changes that will only add to the complexity of the landscape they must navigate. Companies are potentially faced with a 'new normal' given these industry challenges – and once-successful operating models of the past may not work in the future."
Regulatory reform a major concern
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."
Hay added, "Industry executives must focus on the quality of the people in their organization – are the right people at the helm who can differentiate the company by deploying capital (and managing the portfolio) in a creative way? Companies that have their arms around a better way to measure, allocate, manage, and explain to regulators their requirements around capital are going to have a huge advantage over those that accept standard operating models and the default position that the regulators will have related to their capital positions."
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.
The name of the game is GROWTH
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," added 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."
Hay added technology will play a huge role in the near future as many insurance companies upgrade from their old legacy systems and learn to harness the power of all the consumer data they have at their disposal. The companies that adapt the fastest and maximize each consumer interaction will be the winners.
KPMG LLP, the audit, tax and advisory firm, conducted the real-time survey of 350 senior executives at its 23rd Annual Insurance Industry Conference held at the New York Hilton in late September 2011 .
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative ("KPMG International"). KPMG International's member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.