Insurance Execs See Significant Sub-Prime Impact on 2009 Results

September 11, 2008

Insurance executives expect sub-prime and other credit issues to continue to have a significantly negative impact on the industry’s financial performance in 2009, and they see credit and pricing risks as posing the most significant challenges over the next three to five years, according to a survey conducted by KPMG, the audit, tax and advisory firm.

At KPMG’s 20th annual Insurance Industry Conference held in New York, 82 percent of the 375 executives attending said they expect the credit crisis to have a significantly or extremely negative impact on 2009 performance, compared to just 14 percent who said the problem would be finished by the end of this year.

In 2007, only 55 percent felt that the sub-prime issues would have a negative impact on the financial results and performance.

Additionally, 36 percent of the execs expect the risk associated with
adequately pricing insurance products, referred to as pricing risk, to be the most significant challenge over the next three to five years, followed closely by credit risk, identified by 32 percent of the respondents.

“The next few years will be very challenging for many insurers in terms of turning the page on credit issues and in strengthening balance sheets,” said Scott Marcello, partner, Insurance Industry Leader at KPMG LLP. “While executives have been keenly aware of the sub-prime and other credit risks, overall many members of the insurance and broader financial services industries do not seem to have clearly and fully understood their exposure.”

According to the KPMG survey, insurance executives indicated that the industry as a whole did not do a good job understanding its exposure to the credit and sub-prime issues in 2008. In fact, 40 percent gave the industry a grade of ‘D’ or ‘F’, while only 19 percent assigned a grade on ‘B’ or better. Forty-one percent assigned a grade of ‘C’. Ironically, in the 2007 KPMG survey, 72 percent of executives indicated that they were confident their companies had a firm grasp on their exposure to the sub-prime market and related risks.

As to when the economy will recover, 72 percent expect that it will
require more than a year for a substantial economic recovery. Only 23
percent think a substantial recovery will occur in less than one year.

With regard to how they see their own companies performing in the year ahead, 39 percent indicated that they expect their companies to perform below or significantly below expectations, while only 22 percent expect performance to exceed expectations. These views are in stark contrast with those expressed in 2007, when 53 percent expected company performance to be above expectations while only nine percent saw their companies falling short of expectations.

However, in rating the industry’s ability to generate underwriting
profits over the next one to three years, 59 percent rate the increase as moderate and 37 percent weak. This is only slightly more pessimistic than a year ago when 64 percent said moderate and 29 percent said weak. Only three percent expect profits to be strong, which is down from seven percent in

“As expected, with clear concerns about the economy and other risks, executives are tempering their expectations,” added Marcello.

According to the KPMG survey, executives expect increased consolidation in the insurance industry, with 68 percent of respondents indicating that they see an increase in M&A compared to the past 12 months, including 19 percent who see M&A activity increasing significantly. That is an increase of eight percentage points over 2007 survey results, when 59 percent expected an increase.

Source: KPMG LLP

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