Insurance players are optimistic about growth in premium volumes in the coming three years along with an increase in capital reserves and organic expansion, a latest survey has revealed.

Almost half of the senior executives from insurance companies worldwide, including the Middle East, are most positive on premium volumes. Scarcity and high cost of capital, however, remain a major cause for concern for insurers in both life and non-life segments.

Solvency II or a similar legislation will have a positive impact on financial stability and risk management, said more than 60 per cent of the insurers surveyed by KPMG.

"As the dust settles following the financial crisis, the reality of the long road to recovery has become clear to the insurance industry," said Muhammad Tariq, Head of KPMG UAE's Insurance practice and partner in the Dubai firm. "Many executives have come to the conclusion that new regulation may not be a pleasant medicine in terms of short-term growth but ultimately it's good for the industry."

Performance of insurance companies over the past 12 months has been mixed, with 33 per cent saying their business performed better than expected, 25 per cent saying it performed as expected and 42 per cent claiming that it was worse than expected.

Emerging markets of China, India, South Asia and East Asia are where maximum growth would come from whereas weakest growth areas are the United Kingdom, Northern Ireland, Australia and New Zealand, said KPMG.

Cost of capital remains a key concern for the market players, it pointed out. "Most insurers have come through the financial crisis with reasonably strong reserves, but this does not prevent capital from being foremost in their minds when they consider possible constraints on growth. Regulatory intervention, that could force insurers to hold more capital, such as Solvency II, is the number one concern, but survey respondents are also worried about the cost and availability of capital should they need to increase their buffers," said the report.

In spite of the recent "controversy over the recommended parameters for Solvency II", a majority welcomed the new capital regime. Almost 62 per cent were positive on the possible impact of expected increased regulation for the industry over the next three years on risk management, better financial stability and said it would encourage a longer-term view of business.

"But those improvements will come at a cost, as indicated by a majority of the respondents who cited increasing regulatory intervention as the most significant barrier to growth, the main impact of which will be increased capital requirements," said Tariq.

Just over six out of 10 respondents think the legislation will have a positive impact on their management and a similar proportion expect benefits to their capital management. Only about one-third expect a positive impact on their profitability, perhaps, reflecting a concern that a higher cost of capital could push down margins.

"Insurance firms clearly view expected new regulations as an opportunity to strengthen the basics of their business, particularly in terms of risk and capital management," said Tariq. "We are seeing insurance companies increasing their focus on, and investment in, these areas, which is a wise step towards securing a positive future for the industry."

More than half of the survey respondents indicated that the main focus for better risk and capital management should be improving risk-based decision making. Consequently, almost 50 per cent of executives plan to focus on improving co-ordination between the risk and key functions such as finance and lines of business.

The function of risk management is likely to increase in strategic business decisions, the survey found. "More than half expect to increase the involvement of the risk function in strategic business decisions. And, with that increased focus, executives also expect to see some investment in risk and capital management, with the top three areas targeted for increased investment over the next three years being the risk function, 66 per cent; capital management, 57 per cent; and actuarial/finance function, 54 per cent."

Regarding growth expectations, a drop of 24 percentage points from May 2009, to 30 per cent, was noticed in confidence of growth by acquisition or takeover and a drop of nine percentage points to 46 per cent in the expectation of organic growth. The risk appetite of investors is likely to remain constrained for a number of years, said KPMG.