Approximately 75% of insurers anticipate changing the way they manage risk and nearly 40% plan to modify their capital structure over the next 12 months, new research reveals.
PricewaterhouseCoopers International Limited, London, U.K., published this finding in a 2012 annual report, “Top Issues.” The study explores risk and capital management, financial reporting, strategy and execution, regulatory compliance, as well as tax compliance issues and trends.
Because of the low interest rate environment, the report says, insurers are earning less investment income than in prior years. To maintain profit margins, companies are likely to “more aggressively seek ways to reduce expenses.”
Low interest rates are also prompting insurers to “re-examine policyholder experience” and to “address fundamental strategic issues.” Assuming the low interests continue indefinitely, the companies may have to redesign their product portfolios “to reflect new economic realities.”
Turning to mergers and acquisitions, the report observes that only 15% of respondents to PwC’s “15th Annual Global CEO Survey” are planning to carry out a cross-border acquisition in the coming year. The study says that respondents’ uncertainty regarding capital demands and valuations “appears to be making many organizations reluctant to commit to anything more than limited, bolt-on deals.”
In 2011, the report adds, there were 239 announced insurance deals (excluding managed care), compared to 203 in 2010. Total announced deal values increased to $11.9 billion from $9.0 billion in 2010 and $5.0 billion in 2009. However, the 2011 total is down from $21.2 billion in 2008 and $22.0 billion in 2007.
While noting that M&A activity may strengthen in 2012, the PwC report expects that several issues will impact deal activity. Among them: uncertainty respecting legislation and U.S. federal regulation of the industry; an anticipated increase in Solvency II capital requirements for European insurers; continuing low interest rate yields on investments; significant catastrophe-related losses, which may boost policy premiums; and a continuing return of excess capital to shareholders.
Read the full report here.