Insurance Analysts Predict Expansion into Global Markets Will Drive Superior Ratings

That’s one of the conclusions arrived at in a new survey conducted with insurance equity analysts around the world commissioned by Accenture as part of its High Performance Business research.

Along with expansion will come mergers and acquisitions. In fact, the analysts surveyed expect a significant increase in P&C mergers and acquisitions this year.

“The determinants of success within the $3.7 trillion insurance industry are rapidly changing, as new threats and opportunities emerge both regionally and globally,” explained Serge Callet, managing director of Accenture’s Insurance practice. “We tapped the collective insights of these critical industry observers to deepen our understanding of how insurers can earn superior ratings and how they can achieve high performance in a challenging market environment.”

A large majority (85 percent) of life insurance analysts said expansion initiatives by North American, European, and Japanese insurers into Brazil, Russia, India, China, Mexico, or South Korea will be a key driver of superior ratings over the next three years. When asked to identify the preferred means of expansion into such emerging markets, life analysts were far more likely to mention organic growth as a high priority (cited by 82 percent) than mergers and acquisitions (48 percent).

“While opportunities for life insurers vary by geography and market circumstances, our research suggests that analysts overall are looking to reward carriers with bold visions for the longer-term opportunities in emerging markets,” Callet said.

Seventy-one percent of all P&C analysts surveyed said they anticipate a “significant increase” in merger and acquisition activity in 2008. But the survey shows significant differences by geography: P&C analysts in North America are three times as likely as those in Europe to predict a significant increase in mergers and acquisition.

“The logic of consolidation within the property and casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften,” said John Del Santo, managing director of Accenture’s Insurance practice in North America. “However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized.”

The survey also revealed that:

• 77 percent of analysts rate operational efficiency improvement (“transformation”) programs as the most valuable use of capital after share-buybacks and dividend increases.
• 89 percent of P&C analysts cited climate change and environmental issues among the industry’s top three challenges, making it the most widely cited P&C industry challenge in the survey, ahead of aging systems and IT modernization (85 percent), new regulations and reforms (76 percent), cross-border competition (69 percent), terrorism and geopolitical instability (61 percent), growing risk to investment portfolios (59 percent), changing customer demographics (58 percent), workforce demographic changes (52 percent), and competition from banks (35 percent) and capital market firms (27 percent).
• 57 percent of analysts said that IT investment in areas such as policy administration, claims management, process optimization, and call centers are “critical” to the insurance industry over the next three years, and 34 percent called it “important.”