General insurers to fare better than other areas of financial services

2009 will be a tough year for general insurers, but not as tough as for other financial services players, KPMG have warned.

General insurers will have be able to charge higher premiums and will be looking at targeting underwriting profit in 2009. However, there will also be an increase in fraud, said Mark Winlow, European Head of General Insurance Performance Advisory Services at KPMG.

Return of increasing prices: More insurers will be targeting underwriting profit in 2009

“Investment returns will be very low in 2009 and will not compensate for underwriting losses. Moreover, many insurers have little left in terms of reserves to release. Currently, some insurers, desperate to retain business in a recessionary environment, are eroding capital by under pricing risks, but this cannot be sustained. Generally, commerce and consumers appreciate that the future will be riskier and so insurance costs will be higher. The only way ahead is for premiums to rise, thus yielding a return to a hardening market."

Increased incidence of fraud: Insurers need to increase vigilance for fraud by customers and staff

“Economic downturns are linked to increased fraud, both inflated and false claims as well as non- and false disclosure. Insurers are aware of this link but now have more tools available to protect against this activity. These tools and disciplines need not only be applied externally, but internally as well, especially where claims and payment operations have been outsourced. Battling against increased levels of fraud will be a paramount activity for insurers in 2009."

Insurers and brokers will need to make do with less: Cost optimisation will be key

“We expect that insurers will seek to reduce expense ratios in 2009 as a way to improve profitability. Large international groups will draw in spending decisions to head office and only those local investments with compelling business cases will be made. We expect to continue to see significant spend in direct marketing, for instance, but the challenge will be to spend just enough to keep ahead of the competition. This will also apply to distribution more generally: Broker commission and income will trend downwards and the pace of broker consolidation will slow; affinity deals will be revisited to concentrate on those insurance products that are tied closely to the partner’s product or service. Overall, both insurers and brokers will need to make do with less."

Drastic changes to the competitive landscape unlikely, but there is appetite for assets: Banks divesting insurance operations may find buyers, but challenges remain

“The capital challenges faced by banks have already led to mergers and potential, pending divestments. Notwithstanding the protracted sale process relative to RBS Insurance, there will be an appetite for these assets in 2009 and there are currently players in the market who are still well-placed to acquire at realistic prices. These will be companies that have strong capital positions, can be confident in their risk management and capital measurement systems and for whom the assets fit their strategic aims, typically enabling cost synergies from the combination of operations. The challenge for this year will be to bridge the gap between buyer and seller price expectations and for buyers to maintain support from their own investors with sound investment stories."