Chief financial officers (CFOs) from North American property & casualty (P&C) insurance companies identified capital utilization as their top business priority, according to a new P&C insurance CFO survey conducted by global professional services company Towers Watson. The CFOs cited preparing for the Own Risk and Solvency Assessment (ORSA) requirements and monitoring progress toward the renewal of the U.S. Terrorism Risk Insurance Act (TRIA) as their next highest priorities."These are issues with deep repercussions for individual companies and the market. The fact that they are the leading hot topics for P&C CFOs is not surprising," said Alejandra Nolibos, director in Towers Watson's P&C business.
Survey participants expressed contrasting viewpoints with regard to capital utilization over the next one to two years. Their own companies favor internal investments, looking to build or strengthen internal capabilities. At the same time, they see the broader industry leaning toward external capital investments consistent with the search for growth, both organic and inorganic.
Over half (54%) of the respondents cited mergers and acquisitions (M&As) as the most likely use of capital for the broader industry, while 34% noted expansion into new segments and geographies. However, only 11% said their own companies would utilize capital for M&A transactions, and just 20% would use it for business expansion. Respondents said their companies were far more likely to deploy capital for internal investments such as core data systems and infrastructure (49%), data and analytics (40%), new product development (31%), and building talent and skills within the organization (31%). While these investments in the business were the top choices, approximately 30% of CFOs also anticipate returning capital to owners through dividends or buybacks.
"CFOs' notion that the market will invest in M&As may reflect recent activity in that space, an improving economy and the capital position of the industry," said Nolibos. "As regards their own organizations, the expected use of capital speaks to an increasingly competitive and sophisticated market where maintaining and upgrading operations, and the development of new products and ventures, are keys to success. And while this points to companies seeing opportunities in the market in the short and long term, many still anticipate share buybacks or dividends, which may indicate lower expectations for return on equity."
While all respondents identified capital utilization issues as important, strong majorities identified the ORSA (86%) and TRIA (80%) as important to their companies.
Despite the high priority CFOs place on the ORSA and capital management, only 26% indicated their companies will invest in internal risk management and capital utilization capabilities in the next one to two years. "This relatively low ranking is somewhat surprising. Effective risk management is inextricably linked to informed capital utilization decisions and a strong ORSA process," said Nolibos.
In relation to TRIA, over 70% of respondents believe nonrenewal or material reduction to the act would have a minor or no impact on their organization, and none expect a severe impact. "The nature of the responses regarding TRIA indicates CFOs are paying close attention to the federal government's progress on reauthorization, but they don't see the existence of the federal backstop as vital to their business objectives," said Nolibos. "This may reflect an industry on its way to implementing risk management practices through which some extreme risks are seen as manageable."