Insurance Industry Outlook Survey:

Insurance Industry Outlook Survey: Executives Focus on Efficiency, IT, and Talent amid Slow Growth and Regulatory Challenges kpmg.com

KPMG s Industry Outlook Survey KPMG LLP (KPMG), the audit, tax, and advisory firm, surveyed C-suite and other top-level executives in the insurance industry during the second quarter of 212. Participants were asked about business conditions in their sector, the most significant revenue growth opportunities, and any barriers to growth that may exist. They were also asked a variety of questions about the economy, including factors they perceive might impede or support their sector s recovery, and to assess the impact advancing technologies may have on their business model. These responses were compared to the findings of a similar survey conducted among industry executives in the second quarter of 211. 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

Foreword 2 Findings 4 Moving Forward in a Slow Market 6 In Pursuit of Growth and Opportunity 9 Capital Spending and Investing 1 Risk and Regulatory Challenges 12 Data Analytics and Digital Marketing Channels 15 Hope for Recovery Remains on the Horizon 17 Revenue 17 Headcount 18 Conclusion 2 KPMG: A Leader in Serving the Insurance Industry 21 Contents 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

2 212 Insurance Industry Outlook Survey Foreword 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 3 As the insurance industry continues to regain its footing while confronting new and pending capital, regulatory, and compliance requirements, KPMG has again reached out to dozens of senior insurance executives in the United States to gather information about current industry conditions and perspectives on future challenges. What follows on these pages is a report that creates a picture of an evolving industry one that is challenging its business model, seeking new ideas for growth, and one that is wrestling with how to leverage tradition and new approaches. Our intention in publishing this survey report is to both share information from industry insiders and to spark conversation and debate about the key issues that are shaping the contours of the industry landscape. On behalf of KPMG, I would like to thank those who participated in this survey. I hope the findings are useful to you in addressing market challenges and opportunities. I also welcome the chance to discuss this study and its implications for your business in the year ahead. Laura J. Hay National Sector Leader, Insurance KPMG LLP 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

4 212 Insurance Industry Outlook Survey Findings 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 5 Against a backdrop of complex and still-unclear regulatory demands that have emerged from the crisis in the financial service industry, insurance executives who participated in the 212 KPMG Insurance Industry Outlook Survey say operational process improvements and technology enhancements aimed at strengthening consumer connectivity and productivity are at the top of their agenda going forward. The executives find themselves operating in an environment of not only slow growth and pricing pressure, but also one where low interest rates are forcing a reexamination of the traditional business model and directly affecting their bottom line. This report is drawn from the responses of 12 insurance executives from large, U.S.-based companies. The majority of respondents (41 percent) represent companies with annual revenue between $1 billion and $1 billion, while 31 percent are from companies with annual revenue between $1 million and $1 billion, and 27 percent with revenue of more than $1 billion. Fifty-four percent of these companies are publicly held and 46 percent are privately held. Following is a summary of a number of the key findings on this year s survey: Pricing and regulatory and legislative pressures were rated equally (47 percent) as the most significant growth barriers for insurers in the immediate future. When asked about top initiatives, 21 percent of executives cited the improvement of operational processes and related technology, and 2 percent said navigating significant changes in the regulatory environment. In particular, this marks a jump in management focus on regulation, up from 12 percent last year. In their efforts to increase operational efficiencies and maximize value, 64 percent of respondents plan to increase spending on IT, up from 49 percent in 211. In particular, most respondents foresee their IT investment dollars going toward improving IT infrastructure, followed by customer growth or service initiatives, and data warehouses. M&A activity in the insurance industry is expected to continue over the next year. More than half (59 percent) of sector executives believe their company will be involved in a merger or acquisition, either as buyer or seller, over the next two years. Of that group, the majority (48 percent) expect to be the buyers, which was 6 percentage points fewer than the results reported in the 211 industry survey. With insurers challenged to do more with fewer resources, having the right talent is more important than ever. As a result, many executives plan to increase their focus on key talent management areas, including performance management (4 percent), succession planning (39 percent), and development and training (35 percent). In a related finding, 16 percent of respondents said the lack of qualified work force was a barrier to growth triple the level from 211 (5 percent). When asked about their expectations for the U.S. economy a year from now, 61 percent of sector executives expect mostly modest improvements while 32 percent believe it will essentially remain the same. However, 7 percent believe a substantial economic recovery will not occur until 214 215 or later. 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

6 212 Insurance Industry Outlook Survey Moving Forward in a Slow Market 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 7 Challenging market conditions are encouraging insurers to place a greater emphasis on creating value within their organizations. With continued slow growth and pricing pressures in play, executives in this year s survey are looking to increase efficiencies and invest in technology to improve operations and navigate the changing regulatory landscape. This includes upgrading IT infrastructure and realizing the value of data analytics in strategic decision making. Talent management will also play a key role as firms are charged to do more with fewer resources. Overall, firms are relying on their core strengths, and divesting assets and pursuing merger and acquisition strategies, to help fuel growth over the next year. Meanwhile, they have tempered expectations for the year ahead, expecting modest revenue gains and little-to-no change in hiring. Initiatives garnering attention When asked about the top initiatives on the minds of management over the next two years, 21 percent of executives cite the need to significantly improve operational processes and related technology, followed by 2 percent that list navigating significant changes in the regulatory environment. Top management initiatives over the next two years 3 Operating costs over the next year Facing many market challenges, 65 percent of executives foresee continued increases in operating costs over the next year. While market uncertainty remains, the potential for inflation can be viewed as a contributing factor to these anticipated changes in operating costs, as well as underwriting performance, excess capacity, and unusually high catastrophe related losses. 7 6 2 21% 2% 5 1 15% 13% 11% 9% 4 3 2 65% 4% 4% 3% 1 16% 19% Significant improvement of operation processes and related technology Navigating significant changes in the regulatory environment Significant investment in organic growth Merger/acquisition Significant changes in business model Significant cost reduction initiatives Significant changes to financial processes and related technology Strategic divestiture of current assets Improve enterprise risk management programs/processes Increase No change Decrease 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

8 212 Insurance Industry Outlook Survey Increasing the focus on talent With insurers challenged to do more with fewer resources, having the right talent is more important than ever. For many companies, it may be the prime differentiator in achieving success and gaining competitive advantage in the future. As a result, many executives plan to increase their focus on key talent management areas including performance management (4 percent), succession planning (39 percent), and development and training (35 percent). areas of focus regarding talent management in the next two years 5 4 3 2 1 4% 39% 35% 32% 25% 25% 22% 14% 11% Performance management Development/training Rewards/compensation Engagement/communication Global talent management/ workforce planning Succession planning Retention Acquisition/recruiting Diversity Multiple responses allowed 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 9 In Pursuit of Growth and Opportunity The pursuit of growth is an ongoing challenge for insurers faced with evolving regulation and continued market uncertainty. Not surprisingly, a majority of survey respondents widely view pricing pressures (47 percent) and regulatory and legislative pressures (47 percent) as the most significant growth barriers facing their industry over the next year. Barriers to growth 5 47% 47% M&A drivers Much of this activity will be largely driven by the ability to gain access to new markets, according to 56 percent of respondents. Other top drivers cited by executives include regulatory changes (4 percent) and product synergies (31 percent). Important drivers of alliances, mergers, and acquisitions in 213 6 56% 5 4 4% 4 3 31% 28% 25% 3 2 1 Pricing pressures Risk management issues Lack of qualified workforce Multiple responses allowed 2% 2% 16% Regulatory and legislative pressure Lack of customer demand Increased taxation 11% Growth through M&A With M&A activity still a viable strategic factor in their continued efforts to drive growth, 59 percent of insurance executives anticipate that their company will be in a merger or acquisition either as a buyer or seller over the next two years. Likelihood of M&A activity 4 3 2 22% 26% 32% 2 1 Access to new markets Product synergies Improved use of capital Strategic divestiture ofcurrent assets Multiple responses allowed 18% Regulatory changes/pressures Access to new technology and produ Access to new resources 11% Driving revenue According to 37 percent of the executives surveyed, organic growth is still considered a primary driver of revenue growth, down slightly from 42 percent in 211. Respondents also see the introduction of new products (32 percent), price increases (31 percent), and business acquisitions as possessing significant potential to drive revenue. Biggest drivers of revenue growth: next 1 3 years 212 4 3 2 1 37% 32% 31% 27% 24% 23% 23% 2% 14% 1 Very likely as a buyer Very likely as a seller No plans for M&A activity 2% 9% 9% Somewhat likely as a buyer Somewhat likely as a seller Unsure/don t know Organic growth 1 Price increases New distribution channels New opportunities resulting from regulatory changes Stricter underwriting guidelines Multiple responses allowed Introduction of new products Acquisition/joint venture Increased cross-line sales Expansion to new geographic markets 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 26321NSS 1 Increased market share in current geographic area

1 212 Insurance Industry Outlook Survey Capital Spending and Investing Most executives (7 percent) indicate they have significant cash on the balance sheet and are readying to start spending. In fact, 36 percent of that population acknowledges that investment already is significantly underway. Of those with cash on their balance sheets, technology, strategic acquisitions, and customer-centric initiatives are top priorities. Priority investments among those with significant cash available 4 3 36% 27% Ready to spend Sixty-four percent of executives predict their company s capital spending will increase over the next year, up from 47 percent in 211. Technology is expected to get the lion s share of spending, followed by other key areas such as new products and services, business acquisitions, and the regulatory/control environment. Areas for increased spending over the next year 7 6 5 4 3 64% 41% 32% 25% 23% 22% 2% 2 1 17% 7% 7% 6% 2 1 13% 6% 4% 1% Technology Marketing/customer programs Increased dividends Strategic acquisitions Stock repurchase Resources Information technology Acquisition of a business Advertising and marketing Geographic expansion Research and development Green/sustainability initiatives New products or services Regulation/control environment Business model transformation Employee compensation and traini Expanding facilities Multiple responses allowed 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 11 In their quest to create value, insurers realize the critical role information technology will play in their success. When asked to define the highest priorities when spending IT investment dollars, 57 percent of respondents cite improving IT infrastructure at the top of the list. Other high IT-related priorities include achieving customer growth or service and investing in data warehouses. Areas for technology investment 212 6 57% 5 4 37% 3 3% 2 21% 21% 21% 1 12% 12% 9% IT infrastructure Data warehouses E-commerce Forecasting capabilities Accounting systems Customer growth or service Administrative systems Risk modeling and analysis Cloud computing Multiple responses allowed 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

12 212 Insurance Industry Outlook Survey Risk and Regulatory Challenges Evolving regulation and changing marketplace dynamics have emphasized the need for companies to implement a strong internal risk framework. Asked to identify any existing challenges preventing the adoption of a formal risk policy, 34 percent of survey respondents cited culture and behavior as a key challenge, while 27 percent believe that process integration and operational efficiency pose significant obstacles. Challenges preventing the adoption of a formal risk policy 4 3 34% 27% 25% Asked to name the primary focus of their company s enterprise risk management program over the next year 21 percent of insurance executives said it would be to support business decisions. focus of enterprise risk management program 3 2 1 21% 19% 18% 16% 14% 12% 2 19% 19% 1 Culture and behavior Clearly defined roles and responsibilities Shared resources across the organization Multiple responses allowed 12% Process integration/efficiency of operations Governance framework Don t know Supporting business decisions Assessment of risk exposures Improve risk management processes Improve the risk management structure Technology Risk culture and training 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 13 Despite obvious challenges, 64 percent of respondents believe their company is at least somewhat prepared to seize opportunities as a result of public policy and regulatory reform. Meanwhile, 25 percent report being very prepared. Ability to seize opportunities from regulatory change 7 6 64% Fifty-five percent of executives say increased federal oversight, if implemented, will be the regulatory change with the greatest impact on their businesses. Regulatory changes impacting business the most 6 5 55% 5 4 4 3 33% 32% 3 25% 2 2% 19% 18% 2 1 7% 1 8% 3% Somewhat prepared Not prepared Very prepared Don t know Increased federal oversight Consumer protections Accounting valuation and disclosure Convergence of insurance contrac standards 2 Shifting capital requirements Solvency modernization initiatives Group and cross-border supervision Multiple responses allowed 2 This survey was performed before June 212, when certain statements were made by FASB relative to the insurance contracts standard. 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

14 212 Insurance Industry Outlook Survey Tax regulation According to the executives surveyed, evolving tax regulation is expected to impact their business strategy, with 29 percent believing it will result in less capital investment. Potential impact of tax regulation 4 35% 3 29% 2 1 18% 15% 13% 11% Less capital investment Increased overseas expansion Increased domestic expansion Increased M&A activity Changing business structure/impac to hiring Don't know Multiple responses allowed 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 15 Data Analytics and Digital Marketing Channels Data analytic capabilities are becoming more important in helping to support strategic decision making throughout the insurance industry. In fact, 32 percent of executives believe their companies either have competent data analytic capabilities or are en route to achieving higher skills in this area. Data analytics maturity of your company 4 However, challenges exist for companies trying to enhance their data analytic capabilities. Thirty-seven percent of executives say that cleansing and maintaining data integrity is the biggest obstacle toward implementation, while 28 percent cite the complexity of analytic design. Challenges to implementing sophisticated data analytics 4 37% 3 28% 27% 25% 25% 3 2 32% 26% 21% 19% 2 1 19% 18% 16% 13% 11% 1 Average utilization of analytics, Rapidly moving toward high average analytical literacy analytical literacy High data analytics literacy Don t know 2% Some data analytics capabilities, but low analytical literacy in the workforce Cleansing and maintaining data integrity Complexity of analytic design to achieve end result Platform or technology needed to Cost of implementation and support analytics ongoing support Integrating analytic results with Senior management and business changes to performance drivers unit support Lack of skills or vision needed to Volume of data needed to reach analytic capability required support analytics Legal jurisdiction concerns over Lack of available data to support data use analytics Multiple responses allowed 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

16 212 Insurance Industry Outlook Survey Exploring digital marketing channels Insurance executives plan to use digital, social, and mobile technologies in a variety of ways over the next 12 months. In fact, 45 percent have plans to deploy customer-facing mobile applications, while 41 percent will use social media for external brand promotion, and 39 percent expect to use it for recruiting purposes over the next year. Digital marketing strategies planned for year ahead 5 4 45% 41% 39% 36% 3 2 3% 26% 24% 21% 2% 19% 18% 16% 16% 14% 1 9% 8% 8% Customer-facing mobile applications Social media for external brand promotion Social media for recruiting Social media for customer insight Mobile-specific customer-facing Web sites Social media for two-way customer engagement Social media for enterprise collaboration/knowledge sharing Creation and distribution of digital media marketing messages using 3video Enterprise mobile applications Creation and distribution of digital media internal messages using video Location-based marketing using mobile technology Mobile-specific enterprise Web sites (i.e., mobile intranets) Social media for customer crowd sourcing Mobile-commerce technologies 4 Social media for enterprise crowd sourcing Social media for enterprise risk management Don't know Multiple responses allowed 3 Including company-specific external video channels 4 Including NFC-enabled payments and mobile wallets 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 17 Hope for Recovery Remains on the Horizon The U.S. economic recovery continues to be just beyond reach, according to the insurance executives who participated in this year s survey. Seventy percent have pushed back their expectations for a complete U.S. economic recovery until 214 or later. 1 8 1% 29% 4% 38% Revenue Similar to last year s findings, survey respondents reported an increase in revenue. 53 percent say revenues were up this year, as compared to 5 percent in 211. 1 8 6 4 11% 36% 15% 36% 6 27% 2 53% 5% 4 2 43% 58% 212 (Q2) 211 (Q2) Better now Same now Worse now 215 or later 214 213 212 211 212 (Q2) 211 (Q2) Looking forward, executives continue to view external factors as a much greater concern than internal factors. A large majority (7 percent) admit to being more concerned about the economy, competition, and the impact of regulatory changes over their ability to compete or whether they have the right strategic direction internally (3 percent). Nevertheless, more than half (61 percent) say they believe the economy will experience mostly modest improvements over the next year, while 32 percent predict it will stay the same. 1 8 6 4 7% 32% 6% 37% Asked to describe their revenue expectations a year from now, two-thirds (66 percent) of executives predict that revenues will increase, while 27 percent believe revenues will remain the same. Again, this mirrors the expectations of the prior year, when 7 percent and 26 percent, respectively, shared these views. 1 8 6 4 2 7% 27% 66% Increase in revenues About the same 4% 26% 7% 212 (Q2) 211 (Q2) Decrease in revenues 2 61% 57% 212 (Q2) 211 (Q2) Better next year About the same Worse next year 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

18 212 Insurance Industry Outlook Survey Headcount Hiring results remained relatively flat over last year. While 35 percent of respondents say they added personnel, the same amount (35 percent) acknowledge a decrease in headcount. Headcount: Current compared to last year 1 8 35% Moving forward, 45 percent of executives say they expect to increase headcount over the next year. Headcount: Expected year ahead 1 8 3% 21% 6 6 31% 3% 4 4 2 35% 2 45% Increase Decrease 212 (Q2) About the same 212 (Q2) Increase Decrease About the same Unsure/don t know 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 19 Moreover, nearly one-quarter (23 percent) predict their U.S. headcount will not return to prerecession levels until 215 or later, and even more (27 percent) believe that they will never return to those levels. Headcount: Return to prerecession levels 4 3 23% 24% 27% 2 15% 1 % 7% 4% Already at pre-recession level Second half of 212 First half of 213 End of 213 End of 214 End of 215 or later Never v 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

2 212 Insurance Industry Outlook Survey Conclusion Mounting regulatory and legislative pressures combined with pricing volatility continue to create significant challenges and serve as sizable growth barriers for the insurance sector. As a result, insurance executives expect to focus much of their time and energy during the next two years on strategies that will improve their organization s operational processes, help navigate through regulatory changes, and enhance technological capabilities. To support their efforts, executives plan to invest more on technology to improve their IT infrastructure, enhance client products and services, and invest in data warehouses. Meanwhile, insurance executives anticipate modest revenue gains over the next year but remain guarded longer term, not seeing a complete economic recovery until 214 or beyond. 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

212 Insurance Industry Outlook Survey 21 The insurance sector continues to face a demanding market environment that requires companies to adjust and actively manage change that may impact sales and performance. Having the right professional services firm one with the industry depth, knowledge and insight to help clients address their most pressing issues and achieve their goals is critical. KPMG s Insurance practice includes professionals with the knowledge, experience, and skills to help our clients address their most pressing challenges, sort through today s complex business problems, and achieve their goals. Working with our international network of member firms, we serve clients worldwide, developing insights into major business trends and helping to enhance future plans. Our long-term experience in insurance enables us to offer the company-specific guidance needed to help our clients become or remain market leaders. KPMG: A Leader in Serving the Insurance Industry 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

Contacts For more information about this publication or about KPMG s Insurance practice, please contact the following: Laura J. Hay National Sector Leader, Insurance T: 212-872-3383 E: ljhay@kpmg.com Tom Daugherty National Insurance Client Leader, Audit T: 614-249-2336 E: tdaugherty@kpmg.com Ellen Hancock National Insurance Audit Leader T: 86-297-5581 E: ehancock@kpmg.com Craig Pichette National Insurance Tax Leader T: 312-665-5267 E: cpichette@kpmg.com Sue Townsen National Advisory Leader, Insurance T: 212-872-2178 E: stownsen@kpmg.com David White National Actuarial Leader T: 44-222-36 E: dlwhite@kpmg.com Matt McCorry National Leader, Insurance Risk & Performance T: 212-954-3945 E: memccorry@kpmg.com Lourdes Munier National Marketing Director, Insurance T: 21-55-3732 E: lmunier@kpmg.com kpmg.com KPMG LLP, the audit, tax, and advisory firm, is the U.S. member of KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG International s member firms have 145, professionals, including more than 8, partners, in 152 countries. 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 26321NSS