Insurance equity analysts expect higher profitability, despitedifficult market conditions, from the best-performing insurers andwill reward those that expand into emerging markets, according tofindings of a global survey conducted from Accenture.

Commissioned by Accenture and conducted by InstitutionalInvestor Market Research Group, the survey queried 68 insuranceequity analysts in 16 countries and covered a range of topics,including profit and growth strategies in the context of majorindustry challenges.

The survey reveals that the equity analysts expect the insurersthey recommend with “Buy” ratings to deliver an average pre-taxreturn on equity (RoE) of 14.9 percent in 2012, compared to 13.7percent in 2011. Profitability expectations will continue to rise,with half of the overall respondents expecting higher pre-tax RoEin the next three years from insurers with “Buy” ratings.

“Given that the average pre-tax RoE was 11.8 percent in 2011 forthe 20 largest global insurers (based on direct written premium),the expectations set by the equity analysts for 2012 are quitechallenging,” says John Del Santo, global managing director ofAccenture's Insurance practice. “The overall industry isaffected by the difficult economic conditions and ever-morestringent regulatory environment, while property & casualtyinsurers have to struggle with higher volatility of catastropheclaims and life insurers with low interest rates and weak demand.Insurers will have to convince the analyst community that they havethe right strategy to navigate these challenges while raising thebar for revenue growth and profitability, if they want to earnsuperior ratings.”

Expansion into emerging markets is considered by analysts asimportant or critical to earn superior ratings:

• All p&c insurance analysts said merger and acquisition(m&a) initiatives by North American, European, and Japaneseinsurers into Brazil, Russia, India, China, Mexico or South Koreaare an important or critical driver of superior ratings over thenext three years.
• A majority (88 percent) of life insurance analysts said organicgrowth in these emerging markets is important or critical to earnsuperior ratings in the next three years.

“While emerging markets may be crucial to the future performanceof global groups, they are no panacea,” says Thomas Meyer, managingdirector of Accenture's Insurance practice for Europe, Africa andLatin America. “Many countries are resisting the efforts of globalcarriers to enter their markets and compete against local firms.Also, the lack of homogeneity of emerging markets, where thecultural differences are more significant than in Europe, makes itdifficult for insurers to achieve economies of scale acrossborders. Thus, a global operating model which allows the insurer tocapitalize on its proven assets, processes and capabilities, whileadapting to local needs, is essential to expanding into suchmarkets profitably.”

Analysts rank “pricing strategy” and “quality of service” as theindustry's top value drivers over the next three years, named by 95percent and 94 percent of the respondents, respectively, aheadof “data analysis capabilities” (86 percent).

The survey also reveals that underwriting riskmanagement is perceived as the most critical technology investmentto improve business performance, mentioned by two-thirds (67percent) of the analysts surveyed.

“To act decisively in a transforming marketplace and achieveorganic growth, rich data, advanced analytics, and predictivemodeling are invaluable,” says Meyer. “These capabilities helpinsurers understand and segment their markets, and also continuallyrefine their business and operating models to ensure these areideally suited to provide each market segment with the rightproducts, at the right price and through the right distributionchannels.”

In addition, given that the essence of the insurance business isto deal with risks—risks against which they cover theirpolicyholders or risks they are taking by making financialinvestments—profitable growth can't be achieved without highlyefficient risk management capabilities, according to Meyer.

“By aligning risk management with their overall businessstrategy, and integrating it with their key business processes,insurers can enhance operational performance, reduce costs anddeliver distinctively superior customer service by ensuring fairtreatment of policyholders,” he says

Environmental issues, such as the increasing volatility ofnatural catastrophes, are the most widely cited industry challengefor P&C insurers (58 percent), while new regulations andreforms, such as the Solvency II directive and the Dodd–Frankreform, were perceived as the number-one threat for life insurers(83 percent). The uncertainty of financial investment returns wasthe number-two challenge for the overall industry, cited by morethan half (55 percent) of p&c analysts and almost two-thirds(65 percent) of life insurance analysts.

Among the survey's other findings:

• Analysts in Asia Pacific are the most bullish regarding growth:they expect the insurers they recommend with “Buy” ratings to showan average growth rate of 11 percent this year, while theircolleagues in Europe and North America expect 6.7 percent and 6.1percent respectively.
• European analysts are the most demanding in terms ofprofitability: they expect the insurers they recommend with “Buy”ratings to show an average pre-tax RoE of 16.4 percent this year,while their counterparts in North America and Asia Pacific expect12.1 percent and 13.8 percent respectively.
• North American analysts favor organic growth in mature markets(mentioned by 92 percent of North American analysts), ahead ofm&a in emerging markets (78 percent), while European analystsfavor organic growth in both emerging markets (81 percent ofEuropean analysts) and mature markets (59 percent).
• Analysts believe investment volatility (71 percent) and newregulations and reform (52 percent) are the biggest threats toNorth American carriers. For European companies, regulations comefirst (61 percent) and investment volatility second (57 percent).In Asia Pacific, regulations are by far analysts' greatest concern:they score 92 percent, compared to 67 percent for slow growth incore markets and 50 percent for investment volatility.