New York — Insurance executives expect sub-prime and other credit issues to continue to have a significantly negative impact on the industry's financial performance in 2009, and they see credit and pricing risks as posing the most significant challenges over the next three to five years, according to a survey conducted by KPMG LLP, the U.S. member firm of KPMG International.
At KPMG's Insurance Industry Conference in New York, 82% of the 375 executives attending expect the credit crisis to have a significantly or extremely negative impact on 2009 performance, compared to just 14% who said the problem would be finished by the end of this year. In 2007, only 55% felt that the sub-prime issues would have a negative impact on the financial results and performance.
Additionally, 36% of the execs expect the risk associated with adequately pricing risk to be the most significant challenge over the next three to five years, followed closely by credit risk, identified by 32% of the respondents.
Tools to help accurately price risk may be more important than ever, and survey respondents recognize this. Respondents named technology among important areas for future growth.
“While predictive analytics technologies—to enhance claims reserving, fraud detection and personal lines rating—have been around the industry for some time, we are just starting to see some traction in the application of predictive analytics for underwriting,” Dax Craig, president and CEO of Denver-based Valen Technologies Inc., said in the June 2008 issue of INN. “Predictive analytics underwriting systems build carrier-specific risk models based on the company’s historical policy, claims, underwriting, billing and agency data, but also can incorporate more data from external sources.” Underwriters can use predictive models to aid in a variety of underwriting decisions, including appetite and risk selection, tier placement, precision rating and schedule rating.
"The next few years will be very challenging for many insurers in terms of turning the page on credit issues and in strengthening balance sheets," says Scott Marcello, partner, insurance industry leader at KPMG LLP. "While executives have been keenly aware of the sub-prime and other credit risks, overall many members of the insurance and broader financial services industries do not seem to have clearly and fully understood their exposure."
According to the KPMG survey, insurance executives indicated that the industry as a whole did not do a good job understanding its exposure to the credit and sub-prime issues in 2008. In fact, 40% gave the industry a grade of 'D' or 'F', while only 19% assigned a grade on 'B' or better. Forty-one percent assigned a grade of 'C'. Ironically, in the 2007 KPMG survey, 72% of executives indicated that they were confident their companies had a firm grasp on their exposure to the sub-prime market and related risks.
As to when the economy will recover, 72% expect that it will require more than a year for a substantial economic recovery. Only 23% think a substantial recovery will occur in less than one year.
With regard to how they see their own companies performing in the year ahead, 39% indicated that they expect their companies to perform below or significantly below expectations, while only 22% expect performance to exceed expectations. These views are in stark contrast with those expressed in 2007, when 53% expected company performance to be above expectations while only 9% saw their companies falling short of expectations.
Source: PR Newswire, INN archives
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