Insurers are turning introspective. They lived a charmed life when healthy investment returns covered for a lack of efficiency within their operations. Now, they have shifted their focus from asset management back to insurance basics.A new survey performed by the global insurance services practice of New York City-based Deloitte notes that insurers have shifted their focus after a protracted period of low interest rates and volatility in the equity markets.
Deloitte's survey found 79% of senior insurance executives believe the industry is overly dependent on healthy investment returns. At the same time, 86% believe improving their core operations is the best route to bolster profitability.
According to the survey, improved underwriting, more reliable information on risks, enhanced claims management, and tighter controls are once again industry priorities.
"This survey confirms that core insurance operations have now returned to center stage in the pursuit of profitability," says Owen Ryan, global managing partner of Deloitte's insurance practice.
Focus on core business
"With many companies deprived of the investment income they once used to subsidize their core business, industry executives now recognize that some of their practices need to change. I expect that this focus on the core business will continue even after we see a recovery in investment returns," add Ryan.
The report, conducted by the Economist Intelligence Unit for Deloitte in August and September, surveyed 80 senior insurance executives-representing each major geographic region and all industry sectors-on the key challenges and opportunities faced by insurers in the current economy. One-third of survey respondents were based in Europe, 28% from the United States and 22% from the Asia-Pacific region.
In focusing on the core business to turn things around, Deloitte found that executives don't believe they can rely on higher premiums to boost business. In fact, only 11% identify premiums as the most effective way to boost bottom-line profitability.
At the same time, many concede premiums have nonetheless risen to compensate for losses on the asset side, with 33% indicating these losses are the single-most important cause of rising premiums.
In contrast, executives identify cost control as being crucial to profitability. More than three out of four (76%) of life industry respondents--and 68% of property and casualty respondents--indicate that better cost control is an effective way of improving bottom-line profitability. But 57% of survey respondents believe that lower investment returns aren't as big a problem as spiraling costs.
"There are four core areas where the industry is looking to bolster its performance: improved quality of underwriting, enhanced claims management processes, better management of the exposure/risks created from declining investment returns and the development of better business controls and reporting, both operationally and financially," notes Ryan.
Among the survey findings for these four core areas are:
- The most important factor in improving underwriting, say 67% of respondents, is better information on risks. More than three out of five executives (61%) report that their company aims to pursue better risk information in the coming year, and also believe that they need more granular risk assessments than traditional class-based pricing.
- Only 15% describe their claims management process as excellent. Fewer than half believe their processes are good.
- Less than one-quarter of survey respondents (23%) report that their company's internal control environment is "always reliable."
- Each survey participant from the annuity segment says distribution affects the profitability of their business, which is almost mirrored by 93% of life insurance respondents and 86% of those from the property/casualty segment. Nearly 60% say they will consider forming alliances to increase channels in future.
Only 4% of respondents in the survey view conditions in their sector as "excellent," Ryan comments. "This result more than anything else underlines the urgent need for companies to get their focus back where it belongs-back to the business of insurance," he adds.
