Asset allocation, competition, capital management and enterprise risk management (ERM) are still the issues that top the agenda for executives in the insurance industry, reports ratings agency AM Best.
“Interest rates continue to be a concern for all insurers as both underwriting and net operating results have been negatively impacted by the low interest rate environment,” reports Best. “Life insurers have been particularly affected as investment portfolio yields continue to decline and the profitability of spread-based and interest sensitive products come under additional pressure.”
Interest rate sentiment shows a marked change from previous quarterly surveys of the industry conducted by Best, with insurers increasingly pessimistic about the possibility of a material change in interest rates in 2015.
Last summer, just 11% of survey respondents expected US interest rates to remain below 2.25% by the end this year versus 67% who responded to the winter 2015 survey.
In the summer 2014 survey, 86% of respondents expected rates to finish the year somewhere between 2.25% and 3.50% compared to only 32% in our latest survey as it becomes clear that potential rate increases in 2015 would likely be modest and carefully controlled by the US Federal Reserve.
The latest survey also shows that more than two-thirds of respondents believe that competition within the industry is increasing, although the cause varies by segment. The property and casualty (P/C) industry is seeing competition increase mostly as a result of aggressive actions by existing industry players; while life and annuity (L/A) companies are feeling the effects of macro-economic factors; and, health companies are most impacted by regulatory changes.
Best adds that around one in six survey respondents also stated they are more concerned about increased competition from non-traditional companies, which are now offering insurance products and services, than traditional insurance companies.
“We find this response to be surprisingly low as on a more anecdotal level, companies seemed to be very focused on the growing rise of non-traditional players,” Best comments. “The survey highlighted entrants such as capital market players, Google and Walmart. As expected, reinsurers were more aware of the alternative capital supplied by capital market participants with mixed feelings as to whether it provided a benefit or detriment to the industry.
There is an evident desire to execute mergers and acquisitions (M&A) across all industry segments, but it varies by company size. Almost half of all companies with capital and surplus below US$20m responded that they have no interest in M&A, while only 18% of companies larger than US$1bn responded the same.
“Among the largest players, deal flow will be driven mainly by the need to strategically put excess capital to work and diversify the overall business,” comments Best. “While results by segment were mostly consistent, it is worth noting that nearly 20% of L/A companies also responded that M&A activity will be the result of companies attempting to meet targeted growth and market share objectives.”
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