BY KATIE KUEHNER-HEBERT
Increased regulatory pressures are top concerns for insurance executives. At the same time, cost-cutting initiatives and operational improvements have created opportunities for new investments -- particularly in data analytics to improve competitiveness.
Six in 10 C-suite insurance executives said regulatory and legislative pressures were the most likely significant barrier to their companies' growth, according to KPMG's 2013 Insurance Industry Outlook Survey: Balancing Regulatory Change with Rising Costs.
That's a considerable jump -- 13 percentage points -- compared to 2012's results, and 19 points higher than 2011.
"This year, the regulatory concerns have been flying off the page, in terms of priority of the organization," said Laura J. Hay, national sector leader, Insurance, KPMG LLP in New York.
That concern ranked high as well in Ernst & Young's Business Pulse: Exploring the Dual Perspectives of the Top Risks and Opportunities in 2013 and Beyond survey.
Regulatory change was deemed the second biggest threat among executives at more than 65 insurance companies worldwide.
The "greatest threat" to the insurance industry, according to those executives, is a combination of macroeconomic trends and a slow growth rate.
"The macroeconomic environment is just weighing incredibly heavy in the industry, and nobody really sees any relief in sight," said Dave Hollander, E&Y's global insurance advisory leader.
"The challenge for insurers is to create strategies for how they are going to deal with the complexity and interrelatedness of the slowing economies around the world, and they have to have very specific action plans to deal with that."
"Every insurance company, whether big or small, has got to have a strategy around customer growth," Hollander said. "Whether it's business-to-business or business-to-consumer, they've got to have much more aggressive and proactive strategies around keeping those customers they want, and figuring out what exactly they need to strengthen those relationships.
"Predictive analytics should not only be used for pricing or claims processing, but also be used for cross-selling and retention of existing customers -- because that's the source of profits within the industry," he said.
When it comes to analytics, however, insurers seem to be more talk than action, Hay said.
"Whenever I visit companies, data and analytics are very big topics, but when you look at the survey, the change from one year to the next was a surprise -- data literacy within the industry hasn't moved much further," Hay said.
"To embark on data analytics, you need to start at the outcomes first," she said. "If you are not looking for specific actionable insights, then it will be a very expensive proposition and it won't lead to the type of competitive advantage information that you are looking for."
Only about one-quarter (26 percent) of the executives in the KPMG survey said their organization has a high degree of "data and analytics maturity." That was little changed from than the 21 percent who said that in last year's survey.
The executives noted, however, that their company was making progress at increasing their data and analytics capabilities.
As for the regulatory fears, Hay said, the concern is driven by the "sheer volume" of potential regulatory changes and the difficulty of running a business amidst the uncertainty.
For example, the International Accounting Standards Board in June published for public comment a revised exposure draft of proposals for the accounting of insurance contracts, Hay said. Companies are currently reviewing that information to determine whether they should make changes now or delay until the standards are finalized.
"My advice is for companies to build systems that have the flexibility already in them," she said.
The upcoming regulatory changes that create the most apprehension are health care reform (51 percent) and increased federal oversight (44 percent).
Additional regulatory changes mentioned by the executives included convergence of insurance contract standards (24 percent), corporate tax reform (21 percent), consumer protections (19 percent), shifting capital requirements (14 percent), individual tax reform (12 percent), accounting valuation and disclosure (12 percent), group and cross-border supervision (9 percent) and solvency modernization initiatives (8 percent). (Multiple answers were allowed.)
Even with the pressures, many respondents were optimistic.
Nearly three-quarters (73 percent) said their company's revenues increased this year, compared to 53 percent in 2012. Even more (81 percent) expect their revenues to increase over the next year, compared to 66 percent last year.
"We saw a big jump in optimism, not only in the current revenues, but also in the forecast for next year," Hay said. "This is linked to the economy, as well as to the cost-cutting and operational improvements that many companies have gone through the past several years to make them more efficient."
Many of the respondents also said that the primary drivers of growth over the next several years should be due to the launch of new products, organic growth, and "new opportunities resulting from the unfolding regulatory environment."
KATIE KUEHNER-HERBERT is a freelance writer specializing in financial services.
August 7, 2013
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