In the 2013 KPMG Insurance Industry Outlook survey
, 60 percent of executives expressed that regulatory and legislative pressures present the most significant barrier for growth in the coming year, up from 47 percent in KPMG’s 2012 survey and 41 percent from 2011. These numbers starkly contrast the cost-conscious mindset of executives from previous years and are almost completely reversed from 2011.
In that survey, 59 percent cited cost as their chief concern.
“Insurers have experienced a significant shift in the marketplace; in just two years, industry executives have abruptly diverted their attention from pricing concerns to regulatory matters,” said Laura Hay, national leader of KPMG LLP’s insurance practice. “This turnabout is even more significant when you consider that economic conditions have only slightly improved during this time period, so the combination of these two factors creates an exceptionally challenging market.”
Measures, such as healthcare reform, tax reform, accounting changes and increased regulatory oversight both domestic and internationally have required insurers to develop enterprise-wide risk management programs across all risk types. Respondents largely agreed that of all the new regulations, the implementation of the Affordable Care Act (ACA) (51 percent) would have the most significant impact on the industry.
“Regulators continue to ask tough questions and regulatory intrusion is set to increase in the coming years. More than ever, regulations and agendas established internationally, in Washington, as well as in local jurisdictions, have as much influence on the industry as market conditions and consumer confidence,” said David Sherwood, head of KPMG’s U.S. insurance regulatory group. “Insurance executives increasingly find themselves responding to clients that understand the close relationship between cost and regulation. To be successful, insurers must craft and align business strategies that can balance both market forces. This challenge cannot be approached as an exercise in compliance the business must proactively engage in the regulatory dialogue and look for the benefits and the opportunities. They are there.”
Insurers are Better Prepared and See Opportunity Through Regulations
Despite mounting pressures, insurance executives feel confident that their organizations are ready to manage regulatory changes. Thirty-six percent of executives said their companies were “very prepared” to proactively manage the impact of public policy and regulatory changes, up 11 percentage points from last year. Compared to 2012, fewer executives believe their organizations were “somewhat prepared” to meet the challenges (60 percent in 2013 versus 64 percent in 2012). Only one percent of executives admitted that their companies are “not prepared,” down seven percent from 2012.
What’s more, insurance leaders believe new regulations could spur organic growth and increase market share. Thirty-two percent cited regulations as the biggest drivers of revenue growth over the next one to three year period, an increase of nearly 10 percentage points from 2012 and 19 percentage points from 2011.
Confidence Grows in Data and Analytics Capabilities
Insurance executives expressed greater faith in their company’s ability to harness and leverage data and analytics. More than half (55 percent) of respondents believe that their organization demonstrated advanced degrees of data and analytical literacy, up from 47 percent from the previous year. Twenty-nine percent determined that they satisfy the basic requirements (down three percentage points from 2012) while 15 percent indicated that their company still operates with low data and analytical literacy (down four percent from 2012).
Whether they considered themselves champions or slow adopters, 33 percent of insurance executives listed data and analytics as their highest-priority investment area over the next two years, trailing only IT infrastructure. To further substantiate the importance of “Big Data,” 30 percent of executives revealed that investing in data warehouses was a top priority.
“It is clear that investing in data and analytics is money well spent,” added Hay. “Harnessing the vast amounts of data that reside in a company can generate insights that will allow insurers to identify new market opportunities and operating models, improve risk management strategies, engage current and acquire new customers, and gain competitive intelligence. Effectively leveraging data can support growth and profitability goals and those that embrace and implement more sophisticated analytics stand to rise above their competitors.”
Insurers Optimistic on Current Revenue
Despite modest economic growth, nearly three-quarters (73 percent) of insurance executives described their current revenue as better than the previous year, up 20 percent from last year. Executives were also bullish on their future revenues as 81 percent expect an increase next year, a 15 percent uptick from 2012. According to many respondents, new products (39 percent) and organic growth (37 percent) were viewed as the primary drivers of potential revenue growth. “Executives understand the intricate relationship of how these customer-centric growth strategies will drive revenue success. More than ever, the “customer is king” mentality will bode well for insurers that want to differentiate themselves in the marketplace,” added Hay.
M&A Activity Not as Robust
Thanks to shifting needs and slightly improving economic conditions, insurance executives showed less interest in M&A activities. Only 10 percent of respondents indicated that they are “very likely” to be buyers over the next 12 months, down from 22 percent in 2012 and 26 percent in 2011. More than 40 percent of respondents said that they had no plans for M&A activity in 2013.
As opposed to spending on technology (51 percent), insurance executives indicated that allocating resources toward acquisitions ranked low on their list of priorities (17 percent). Executives appear more inclined to spend on expanding their corporate footprint (34 percent), both in the United States (17 percent) and in high-growth emerging markets (12 percent) than in developed markets (five percent).
According to 41 percent of executives, access to new markets will be the main driver of M&A activity. Once again, regulations made an impact as regulatory changes and pressures ranked as the second leading driver of M&A (36 percent). “Addressing regulatory challenges factored into nearly every category in this year’s survey. It is clear that successful insurance companies are those with the ability to keep up with volume, ensure compliance, and develop responsive yet forward-thinking solutions in today’s regulatory-driven market,” concluded Hay.
THE KPMG INSURANCE INDUSTRY OUTLOOK SURVEY
The KPMG survey was conducted in Spring 2013 and reflects the responses of 101 senior executives in the insurance industry. Based on revenue in the most recent fiscal year, 33 percent of respondents work for institutions with annual revenues exceeding $10 billion, 40 percent with annual revenues in the $1 billion to $10 billion range, and 27 percent with revenues in the $100 million to $1 billion range. Survey responses were received more than 3 months prior to the release of the 2013 IASB and FASB exposure drafts. Download a complete copy of the report by clicking here or request a copy from Matt Caruso (firstname.lastname@example.org).
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International.”) KPMG International’s member firms have 145,000 people, including more than 8,000 partners, in 152 countries.
Contact: Matt Caruso