Insurance executives expect negative impacts from mortgage and credit issues to continue affecting their industry's performance in 2009, and in the long term see the most significant challenge as credit and pricing risks, a survey has found.

Their opinions were polled by KPMG, the audit, tax and advisory firm, at the company's 20th annual Insurance Industry Conference in New York.

Eighty-two percent of the 375 executives attending said they expect the credit crisis to have a significantly or extremely negative impact on 2009 performance, compared to just 14 percent who said the problem would be finished by the end of this year.

In 2007, only 55 percent felt that the subprime mortgage market issues would have a negative impact on financial results and performance.

Additionally, 36 percent of those polled said they expect the risk associated with adequately pricing insurance products–referred to as pricing risk–to be the most significant challenge over the next three to five years, followed closely by credit risk, identified by 32 percent of the respondents.

Scott Marcello, KPMG partner and insurance industry leader, said, “The next few years will be very challenging for many insurers in terms of turning the page on credit issues and in strengthening balance sheets.”

He noted, “While executives have been keenly aware of the subprime and other credit risks, overall many members of the insurance and broader financial services industries do not seem to have clearly and fully understood their exposure.”

According to the KPMG survey, insurance executives indicated that the industry as a whole did not do a good job understanding its exposure to the credit and subprime issues this year, and 40 percent gave the industry a grade of “D” or “F,” while only 19 percent assigned a grade on “B” or better. Forty-one percent assigned a grade of “C.”

Ironically, in the 2007 KPMG survey, 72 percent of executives indicated that they were confident their companies had a firm grasp on their exposure to the subprime market and related risks.

Asked when the economy will recover, 72 percent said they expect that it will require more than a year for a substantial economic recovery. Only 23 percent think a substantial recovery will occur in less than one year. Two percent said they don't believe the economy is in a downturn; 2 percent had no idea when a turnaround would happen; and 1 percent said that it is already underway.

With regard to how they see their own companies performing in the year ahead, 39 percent indicated they expect their companies to perform below or significantly below expectations. Only 22 percent expect performance to exceed expectations.

These views are in stark contrast with those expressed in 2007, when 53 percent expected company performance to be above expectations while only 9 percent saw their companies falling short of expectations.

Rating the industry's ability to generate underwriting profits over the next one to three years, 59 percent rate the increase as moderate and 37 percent weak.

These profit estimates are only slightly more pessimistic than a year ago when 64 percent said moderate and 29 percent said weak. Only 3 percent expect profits to be strong, which is down from 7 percent in 2007.

According to the KPMG survey, executives expect increased consolidation in the insurance industry, with 68 percent of respondents indicating that they see an increase in mergers and acquisitions compared to the past 12 months, including 19 percent who see M&A activity increasing significantly. That is an increase of eight percentage points over 2007 survey results, when 59 percent expected an increase.

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