2012 Insurance Outlook Survey

7/30/2019 2012 Insurance Outlook Survey

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Insurance Industry

Outlook Survey:

Executives Focus on Efficiency,IT, and Talent amid Slow Growth

and Regulatory Challenges

kpmg.com


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KPMG LLP (KPMG), the audit, tax, and advisory firm, surveyed

C-suite and other top-level executives in the insurance industry

during the second quarter of 2012.

Participants were asked about business conditions in their sector,

the most significant revenue growth opportunities, and any barriersto growth that may exist. They were also asked a variety of questions

about the economy, including factors they perceive might impede or

support their sectors recovery, and to assess the impact advancing

technologies may have on their business model. These responses

were compared to the findings of a similar survey conducted among

industry executives in the second quarter of 2011.

KPMGs

Industry Outlook Survey

2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent membefirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent membefirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS


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Contents

Foreword 2

Key Findings 4

Moving Forward in a Slow Market 6

In Pursuit of Growth and Opportunity 9Capital Spending and Investing 10

Risk and Regulatory Challenges 12

Data Analytics and Digital Marketing Channels 15

Hope for Recovery Remains on the Horizon 17

Revenue 17

Headcount 18

Conclusion 20

KPMG: A Leader in Serving the Insurance Industry 21

2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS


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2 | 2012Insurance Industry Outlook Survey

Foreword

2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent membefirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS


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2012Insurance Industry Outlook Survey | 3

As the insurance industry continues to regain its footing while confronting newand pending capital, regulatory, and compliance requirements, KPMG has again

reached out to dozens of senior insurance executives in the United States togather information about current industry conditions and perspectives on future

challenges.

What follows on these pages is a report that creates a picture of an evolving

industry one that is challenging its business model, seeking new ideas forgrowth, and one that is wrestling with how to leverage tradition and new

approaches.

Our intention in publishing this survey report is to both share information from

industry insiders and to spark conversation and debate about the key issues thatare shaping the contours of the industry landscape.

On behalf of KPMG, I would like to thank those who participated in this survey.I hope the findings are useful to you in addressing market challenges and

opportunities. I also welcome the chance to discuss this study and its implicationsfor your business in the year ahead.

Laura J. Hay

National Sector Leader, InsuranceKPMG LLP

2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS


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Key Findings



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Against a backdrop of complex and still-unclear

regulatory demands that have emerged from thecrisis in the financial service industry, insurance

executives who participated in the 2012 KPMG

Insurance Industry Outlook Survey say operational

process improvements and technology

enhancements aimed at strengthening consumer

connectivity and productivity are at the top of their

agenda going forward.

The executives find themselves operating in an environment ofnot only slow growth and pricing pressure, but also one where

low interest rates are forcing a reexamination of the traditionalbusiness model and directly affecting their bottom line.

This report is drawn from the responses of 102 insurance

executives from large, U.S.-based companies. The majority ofrespondents (41 percent) represent companies with annual

revenue between $1 billion and $10 billion, while 31 percent arefrom companies with annual revenue between $100 million and

$1 billion, and 27 percent with revenue of more than $10 billion.Fifty-four percent of these companies are publicly held and46 percent are privately held.

Following is a summary of a number of the key findings on this

years survey:

Pricingandregulatoryandlegislativepressureswererated

equally (47 percent) as the most significant growth barriersfor insurers in the immediate future.

Whenaskedabouttopinitiatives,21percentofexecutives

cited the improvement of operational processes and related

technology, and 20 percent said navigating significant

changes in the regulatory environment. In particular, this

marks a jump in management focus on regulation, up from12 percent last year.

Intheireffortstoincreaseoperationalefficienciesand

maximize value, 64 percent of respondents plan to increasespending on IT, up from 49 percent in 2011. In particular, mostrespondents foresee their IT investment dollars going toward

improving IT infrastructure, followed by customer growth orservice initiatives, and data warehouses.

M&Aactivityintheinsuranceindustryisexpectedto

continue over the next year. More than half (59 percent) of

sector executives believe their company will be involved in amerger or acquisition, either as buyer or seller, over the next

two years. Of that group, the majority (48 percent) expect tobe the buyers, which was 6 percentage points fewer than theresults reported in the 2011 industry survey.

Withinsurerschallengedtodomorewithfewerresources,

having the right talent is more important than ever. As aresult, many executives plan to increase their focus onkey talent management areas, including performance

management (40 percent), succession planning (39 percent),and development and training (35 percent). In a related

finding, 16 percent of respondents said the lack of qualifiedwork force was a barrier to growth triple the level from

2011 (5 percent).

WhenaskedabouttheirexpectationsfortheU.S.economy

a year from now, 61 percent of sector executives expectmostly modest improvements while 32 percent believe

it will essentially remain the same. However, 70 percentbelieve a substantial economic recovery will not occur until2014 2015 or later.



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Moving Forward in a Slow Market



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Challenging market conditions are encouraging insurers to place a

greater emphasis on creating value within their organizations. With

continued slow growth and pricing pressures in play, executives

in this years survey are looking to increase efficiencies and invest

in technology to improve operations and navigate the changing

regulatory landscape. This includes upgrading IT infrastructure and

realizing the value of data analytics in strategic decision making.

Talent management will also play a key role as firms are charged

to do more with fewer resources. Overall, firms are relying on

their core strengths, and divesting assets and pursuing merger

and acquisition strategies, to help fuel growth over the next year.

Meanwhile, they have tempered expectations for the year ahead,

expecting modest revenue gains and little-to-no change in hiring.

Initiatives garnering attentionWhen asked about the top initiatives on the minds ofmanagement over the next two years, 21 percent of executives

cite the need to significantly improve operational processes andrelated technology, followed by 20 percent that list navigating

significant changes in the regulatory environment.

Top management initiatives over the next two years

ey

0

10

20

30

21%20%

15%

13%

11%

9%

4% 4%3%

Significant improvement of operation processes and related technology Navigating significant changes in the regulatory environment Significant investment in organic growth Merger/acquisition Significant changes in business model Significant cost reduction initiatives Significant changes to financial processes and related technology Strategic divestiture of current assets Improve enterprise risk management programs/processes

Operating costs over the next yearFacing many market challenges, 65 percent of executivesforesee continued increases in operating costs over the

next year. While market uncertainty remains, the potentialfor inflation can be viewed as a contributing factor to

these anticipated changes in operating costs, as well asunderwriting performance, excess capacity, and unusually high

catastrophe-related losses.

Key

0

10

20

30

40

50

60

70

65%

16%19%

Increase No change Decrease



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Increasing the focus on talentWith insurers challenged to do more with fewer resources,having the right talent is more important than ever. For many

companies, it may be the prime differentiator in achievingsuccess and gaining competitive advantage in the future.

As a result, many executives plan to increase their focuson key talent management areas including performancemanagement (40 percent), succession planning (39 percent),

and development and training (35 percent).

Key areas of focus regarding talent management in

the next two years

Key

0

10

20

30

40

50

40%

Performance management Succession planning

Development/training Retention

Rewards/compensation Acquisition/recruiting

Engagement/communication Diversity

Global talent management/workforce planning

39%35%

32%

25% 25%22%

14%11%

Multiple responses allowed



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In Pursuit of Growth andOpportunity

The pursuit of growth is an ongoing challenge for insurers facedwith evolving regulation and continued market uncertainty.

Not surprisingly, a majority of survey respondents widely view

pricing pressures (47 percent) and regulatory and legislativepressures (47 percent) as the most significant growth barriers

facing their industry over the next year.

Barriers to growth

Key

0

10

20

30

40

50 47%

Pricing pressures Regulatory and legislative pressur

Risk management issues Lack of customer demand

Lack of qualified workforce Increased taxation

47%

20% 20%

16%

11%


Growth through M&AWithM&Aactivitystillaviablestrategicfactorintheir

continued efforts to drive growth, 59 percent of insurance

executives anticipate that their company will be in a merger oracquisition either as a buyer or seller over the next two years.

Likelihood of M&A activity

ey

0

10

20

30

40

22%

Very likely as a buyer Somewhat likely as a buyer

Very likely as a seller Somewhat likely as a seller

NoplansforM&Aactivity Unsure/dont know

26%

2%

9%

32%

9%

M&A driversMuch of this activity will be largely driven by the ability to gain

access to new markets, according to 56 percent of respondents.Other top drivers cited by executives include regulatory changes(40 percent) and product synergies (31 percent).

Important drivers of alliances, mergers, and acquisitions in

2013

Key

0

10

20

30

40

50

60 56%

Access to new markets Regulatory changes/pressures

Product synergies Access to new technology and produ

Improved use of capital Access to new resources

Strategic divestiture ofcurrent assets

40%

31%28%

25%

18%

11%


Driving revenueAccording to 37 percent of the executives surveyed, organic

growth is still considered a primary driver of revenue growth,down slightly from 42 percent in 2011. Respondents also see

the introduction of new products (32 percent), price increases(31 percent), and business acquisitions as possessing

significant potential to drive revenue.

Biggest drivers of revenue growth: next 1 3 years 2012

Key

0

10

20

30

4037%

Organic growth1 Introduction of new products

Price increases Acquisition/joint venture

New distribution channels Increased cross-line sales

New opportunities resulting from Expansion to new geographicregulatory changes markets

Stricter underwriting guidelines

32%31%

27%

24%23% 23%

20%

14%


1 Increased market share in current geographic area 2012 KPMG LLP, a Delaware limited liability par tnership and the U.S. member firm of theKPMG network of independent member firms a ffiliated with KPMG International Cooperative(KPMG International), a Swiss entity. All rights reserved. 26321NSS


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Capital Spending and InvestingMost executives (70 percent) indicate they have significant

cash on the balance sheet and are readying to start spending.In fact, 36 percent of that population acknowledges that

investment already is significantly underway. Of those withcash on their balance sheets, technology, strategic acquisitions,

and customer-centric initiatives are top priorities.

Priority investments among those with significant cash

available

Key

0

10

20

30

4036%

Technology Strategic acquisitions

Marketing/customer programs Stock repurchase

Increased dividends Resources

27%

17%

7% 7%6%

Ready to spendSixty-four percent of executives predict their companys capitalspending will increase over the next year, up from 47 percent in

2011. Technology is expected to get the lions share of spendingfollowed by other key areas such as new products and services

business acquisitions, and the regulatory/control environment.

Areas for increased spending over the next year

Key

0

10

20

30

40

50

60

7064%

Information technology New products or services

Acquisition of a business Regulation/control environment

Advertising and marketing Business model transformation

Geographic expansion Employee compensation and train

Research and development Expanding facilities

Green/sustainability initiatives

41%

32%

25%23% 22%

20%

13%

6%4%

1%




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In their quest to create value, insurers realize the criticalrole information technology will play in their success. When

asked to define the highest priorities when spending ITinvestment dollars, 57 percent of respondents cite improving

IT infrastructure at the top of the list. Other high IT-relatedpriorities include achieving customer growth or service and

investing in data warehouses.

Areas for technology investment 2012

Key

0

10

20

30

40

50

60 57%

IT infrastructure Customer growth or service

Data warehouses Administrative systems

E-commerce Risk modeling and analysis

Forecasting capabilities Cloud computing Accounting systems

37%

30%

21% 21% 21%

12% 12%9%




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Risk and Regulatory ChallengesEvolving regulation and changing marketplace dynamics

have emphasized the need for companies to implement astrong internal risk framework. Asked to identify any existing

challenges preventing the adoption of a formal risk policy,34 percent of survey respondents cited culture and behavior

as a key challenge, while 27 percent believe that processintegration and operational efficiency pose significantobstacles.

Challenges preventing the adoption of a formal risk policy

Key

0

10

20

30

40

34%

Culture and behavior Process integration/efficiencyof operations

Clearly defined roles and responsibilities Governance framework

Shared resources across the organization Dont know

27%25%

19%

12%

19%


Asked to name the primary focus of their companys enterpriserisk management program over the next year 21 percent ofinsurance executives said it would be to support business

decisions.

Key focus of enterprise risk management program

Key

0

10

20

30

21%

Supporting business decisions Assessment of risk exposures

Improve risk management processes Improve the risk managementstructure

Technology Risk culture and training

19%18%

16%

14%

12%



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Despite obvious challenges, 64 percent of respondentsbelieve their company is at least somewhat prepared to seizeopportunities as a result of public policy and regulatory reform.

Meanwhile, 25 percent report being very prepared.

Ability to seize opportunities from regulatory change

ey

0

10

20

30

40

50

60

7064%

Somewhat prepared Very prepared

Not prepared Dont know

25%

8%

3%

Fifty-five percent of executives say increased federal oversight,if implemented, will be the regulatory change with the greatestimpact on their businesses.

Regulatory changes impacting business the most

Key

0

10

20

30

40

50

6055%

Increased federal oversight Convergence of insurance contracstandards2

Consumer protections Shifting capital requirements

Accounting valuation and disclosure Solvency modernization initiatives

Group and cross-border supervision

33% 32%

20% 19%18%

7%


2 This survey was performed before June 2012, when certain statements were

made by FASB relative to the insurance contracts standard.



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Tax regulationAccording to the executives surveyed, evolving tax regulationis expected to impact their business strategy, with 29 percent

believing it will result in less capital investment.

Potential impact of tax regulation

Key

0

10

20

30

40

29%

Less capital investment IncreasedM&Aactivity

Increased overseas expansion Changing business structure/impato hiring

Increased domestic expansion Don't know

18%

15%13%

11%

35%




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Data Analytics and DigitalMarketing Channels

Data analytic capabilities are becoming more important in

helping to support strategic decision making throughoutthe insurance industry. In fact, 32 percent of executivesbelieve their companies either have competent data analytic

capabilities or are en route to achieving higher skills in this area.

Data analytics maturity of your company

ey

0

10

20

30

40

32%

Average utilization of analytics, Rapidly moving toward highaverage analytical literacy analytical li teracy

High data analytics literacy Some data analytics capabilities,but low analytical literacy in the workforce

Dont know

26%

21%19%

2%

However, challenges exist for companies trying to enhance

their data analytic capabilities. Thirty-seven percent ofexecutives say that cleansing and maintaining data integrity is

the biggest obstacle toward implementation, while 28 percentcite the complexity of analytic design.

Challenges to implementing sophisticated data analytics

Key

0

10

20

30

4037%

Cleansing and maintaining data integrity Complexity of analytic design toachieve end result

Platform or technology needed to Cost of implementation andsupport analytics ongoing support

Integrating analytic results with Senior management and businesschanges to performance drivers unit support

Lack of skills or vision needed to Volume of data needed toreach analytic capability required support analytics

Legal jurisdiction concerns over Lack of available data to supportdata use analytics

28%27%

25% 25%

19% 18%16%

13%11%




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Exploring digital marketing channelsInsurance executives plan to use digital, social, and mobiletechnologies in a variety of ways over the next 12 months. In

fact, 45 percent have plans to deploy customer-facing mobile

applications, while 41 percent will use social media for externalbrand promotion, and 39 percent expect to use it for recruitingpurposes over the next year.

Digital marketing strategies planned for year ahead

Key

0

10

20

30

40

5045%

Customer-facing mobile applications

Social media for external brand promotion

Social media for recruiting

Social media for customer insight

Mobile-specific customer-facing Web sites

Social media for two-way customer engagement

Social media for enterprise collaboration/knowledge sharing

Creation and distribution of digital media marketing messages using video

3

Enterprise mobile applications

Creation and distribution of digital media internal messages using video

Location-based marketing using mobile technology

Mobile-specific enterprise Web sites (i.e., mobile intranets)

Social media for customer crowd sourcing

Mobile-commerce technologies4

Social media for enterprise crowd sourcing

Social media for enterprise risk management

Don't know

41%39%

36%

30%

26%24%

21%20%

16%

14%

9% 8%

19% 18%16%

8%


3 Including company-specific external video channels4 Including NFC-enabled payments and mobile wallets



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Hope for Recovery Remainson the Horizon

The U.S. economic recovery continues to be just beyondreach, according to the insurance executives who participatedin this years survey. Seventy percent have pushed back their

expectations for a complete U.S. economic recovery until 2014or later.

ey

0

20

40

60

80

100

2015 or later 2014 2013 2012 2011

43%

27%

29%

1%

58%

2012 (Q2) 2011 (Q2)

38%

4%

Looking forward, executives continue to view external factorsas a much greater concern than internal factors. A large

majority (70 percent) admit to being more concerned aboutthe economy, competition, and the impact of regulatory

changes over their ability to compete or whether they have theright strategic direction internally (30 percent). Nevertheless,more than half (61 percent) say they believe the economy will

experience mostly modest improvements over the next year,while 32 percent predict it will stay the same.

Key

0

20

40

60

80

100

Better next year About the same Worse next year

61%

32%

7%

57%

2012 (Q2) 2011 (Q2)

37%

6%

Revenue

Similar to last years findings, survey respondents reportedan increase in revenue. 53 percent say revenues were up this

year, as compared to 50 percent in 2011.

Key

0

20

40

60

80

100

Better now Same now Worse now

53%

36%

11%

50%

2012 (Q2) 2011 (Q2)

36%

15%

Asked to describe their revenue expectations a year from now,two-thirds (66 percent) of executives predict that revenues will

increase, while 27 percent believe revenues will remain thesame. Again, this mirrors the expectations of the prior year,

when 70 percent and 26 percent, respectively, shared theseviews.

Key

0

20

40

60

80

100

Increase in revenues About the same Decrease in revenues

66%

27%

7%

70%

2012 (Q2) 2011 (Q2)

26%

4%



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Headcount

Hiring results remained relatively flat over last year. While

35 percent of respondents say they added personnel, the sameamount (35 percent) acknowledge a decrease in headcount.

Headcount: Current compared to last year

Key

0

20

40

60

80

100

Increase About the same

Decrease

35%

30%

35%

2012 (Q2)

Moving forward, 45 percent of executives say they expect toincrease headcount over the next year.

Headcount: Expected year ahead

Key

0

20

40

60

80

100

Increase About the same

Decrease Unsure/dont know

45%

31%

21%

3%

2012 (Q2)



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Moreover, nearly one-quarter (23 percent) predict their U.S.headcount will not return to prerecession levels until 2015 or

later, and even more (27 percent) believe that they will neverreturn to those levels.

Headcount: Return to prerecession levels

Key

0

10

20

30

40

23%

Already at pre-recession level Second half of 2012

First half of 2013 End of 2013

End of 2014 End of 2015 or later

Never

0%

7%

15%

4%

24%

27%

v



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Mounting regulatory and legislative pressures combined with pricing volatilitycontinue to create significant challenges and serve as sizable growth barriers forthe insurance sector. As a result, insurance executives expect to focus much of

their time and energy during the next two years on strategies that will improve theirorganizations operational processes, help navigate through regulatory changes, and

enhance technological capabi lities. To support their efforts, executives plan to investmore on technology to improve their IT infrastructure, enhance client products

and services, and invest in data warehouses. Meanwhile, insurance executivesanticipate modest revenue gains over the next year but remain guarded longer term,not seeing a complete economic recovery until 2014 or beyond.

Conclusion



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The insurance sector continues to face a demanding market environment thatrequires companies to adjust and actively manage change that may impact sales andperformance.

Having the right professional services firmone with the industry depth, knowledge

and insight to help clients address their most pressing issues and achieve theirgoalsis critical. KPMGs Insurance practice includes professionals with the

knowledge, experience, and skills to help our clients address their most pressingchallenges, sort through todays complex business problems, and achieve their goals.

Working with our international network of member firms, we serve clients worldwide

developing insights into major business trends and helping to enhance future plans.Our long-term experience in insurance enables us to offer the company-specific

guidance needed to help our clients become or remain market leaders.

KPMG: A Leader in Servingthe Insurance Industry 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 26321NSS


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KPMG LLP, the audit, tax, and advisory firm, is the U.S. member of KPMG International Cooperative (KPMG International), a Swiss

entity. KPMG Internationals member firms have 145,000 professionals, including more than 8,000 partners, in 152 countries.

20 2 KPMG LLP D l li i d li bili hi d h U S b fi f h KPMG k f i d d b

Key Contacts

For more information about this publication or about KPMGs Insurance practice,please contact the following:

Laura J. Hay

National Sector Leader, Insurance

T: 212-872-3383E: [email protected]

Tom Daugherty

National Insurance Client Leader, Audit

T:614-249-2336E:[email protected]

Ellen Hancock

National Insurance Audit Leader


Craig Pichette

National Insurance Tax Leader

T:312-665-5267

E:[email protected]

Sue Townsen

National Advisory Leader, Insurance

T:212-872-2178

E:[email protected]

David White

National Actuarial Leader


Matt McCorry

National Leader, Insurance Risk & Performance


Lourdes Munier

National Marketing Director, Insurance


kpmg.com

Documents

2012 Insurance Outlook Survey