Insurers are more pessimistic than ever about business conditions, notes a new report issued by audit, tax and advisory firm
The survey of 350 insurance executives--representing an even mix of respondents from property and casualty (personal and commercial lines) and life, along with approximately 5 percent from health--was conducted at KPMG's 23rd Annual Insurance Industry Conference, where more than a third (36 percent) of those queried said business conditions 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. Further, respondents are not expecting improvements in the next 18 to 24 months, with 28 percent of respondents predicting another downturn/double dip before the economy begins to significantly recover. A full 58 percent of those queried believe the recovery will not occur until 2013 or later, says KPMG. Against these dire economic views, 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.
Not surprising is the concern insurers have over adequate pricing. Executives continue to tell KPMG that improving underwriting profit may be challenging in the next three years. In fact, nearly four in 10 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.
Additional concerns also linger over the risk associated with regulatory reform, chiefly those reforms that affect shifting capital requirements, accounting valuation and disclosure, convergence of insurance contract standards and solvency modernization initiatives, according to survey results.
"As has been the case for a number of years now, insurers continue to carry a significant amount of capital," said Laura Hay, national leader of KPMG's U.S. insurance practice. "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."
The bulk of KPMG’s attendees (87 percent) confirmed their belief that reforms coming from the banking industry, such as the requirement for higher capital levels, will make their way into the current insurance regulatory arena.
Insurers’ response to this dire climate is one of optimism, however, as executives confirmed that the top initiative from a management perspective over the next two years will be organic growth. In addition to organic growth, acquisitions/joint ventures and the introduction of new products will be the biggest drivers of revenue growth over the next three years.
Not surprising, these areas will require a focus and renewed commitment by insurers on investments in technologies, new products or services and strategic acquisitions, said the report.
"The industry is in a precarious situation," said Hay. "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."
