Deloitte Survey Says 80% of Insurance Execs Report Industry is Overdependent on Investment Returns

November 18, 2003

After years of low interest rates and volatility in the equity markets, senior insurance company executives are reportedly shifting their focus from asset management back to insurance basics.

A new survey by the global insurance services practice of Deloitte reportedly finds that 79 percent of insurance executives believe that the insurance industry is overdependent on healthy investment returns. At the same time, 86 percent feel improving their core insurance operations is the best route to strong 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,” said Owen Ryan, global managing partner of the firm’s insurance practice. “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 of insurance will continue even after we see a recovery in investment returns.”

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 percent from the United States and 22 percent from the Asia-Pacific region.

Deloitte found insurance executives do not believe they can look purely to higher premiums to boost business. In fact, only 11 percent say premiums are the most effective way to boost bottom-line profitability. At the same time, many concede premiums have risen to compensate for losses on the asset side, with 33 percent of the survey’s insurance executives saying it is the single most important cause of rising premiums.

In contrast, executives identified cost control as being crucial to profitability. More than three out of four (76 percent) life industry respondents – and 68 percent of property/casualty respondents – say better cost control is an effective way of improving bottom-line profitability. But 57 percent 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,” said Ryan.

Among the survey findings for these four core areas are:

— The most important factor in improving underwriting, say 67 percent of respondents, is better information on risks. More than three out of five executives (61 percent) say 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 affords. Many are integrating various proxies to try and hone risk assessments more closely to an individual or business.

— Only 15 percent describe their claims management process as excellent. Fewer than half believe their processes are good; the rest say they are fair.

— Less than one-quarter of survey respondents (23 percent) say their company’s internal control environment is “always reliable,” with 24 percent conceding that internal controls are often unreliable.

— Each survey participant from the annuity segment say distribution affects the profitability of their business, which is almost mirrored by 93 percent of life insurance respondents and 86 percent of those from the property and casualty segment. Nearly 60 percent say they will consider forming alliances to increase channels in future.

According to Ryan, only 4 percent of respondents in our survey viewed conditions in their sector as ‘excellent.’ “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.”

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