A new survey of insurance providers by global consulting firm KPMG LLP indicates a “dramatic reversal” of this sector’s economic outlook is underway – a reversal that may result in higher insurance rates.

According to the 350 insurance executives polled by KPMG, more than a third (36%) said that business conditions for the insurance sector have worsened compared to a year ago – a significant turnaround in executive perception compared to last year’s survey, the firm noted, when more than half (51%) said conditions had improved from 2009 to 2010.

In addition, many do not anticipate much brighter prospects in the next 18 to 24 months, as 28% predict another downturn/double dip before the economy begins to significantly recover, and 58% believe the recovery will not occur until 2013 or later.

Facing this economic environment, only 31% of insurance execs surveyed expect their company to perform above expectations next year – a decline of 10% compared last year’s poll – while 24% expect to perform below expectations; up from 19% in 2010.

On top of that, KPMG’s poll found that improving underwriting profit may be one of the biggest issues over the next three years, with nearly four in ten executives (39%) characterizing the chance of increased underwriting profit as “weak,” up from 33% last year, with only 2% expecting strong profitability, down from 4% in 2010.

Faced with continuing economic sluggishness, the executives in KPMG’s survey said the most significant challenges for the industry over the next three to five years are the risk associated with adequately pricing insurance products and hurdles posed by regulatory reform.

“The industry is in a precarious situation,” said Laura Hay, national leader of KPMG's U.S. insurance practice.

“These companies are challenged with the proverbial ‘perfect storm,’ including a sluggish economy, a weak pricing environment, and the inability to generate sufficient underwriting profit,” she explained. “The industry is also faced with unprecedented regulatory changes that will only add to the complexity of the landscape they must navigate. Companies are potentially faced with a ‘new normal’ given these industry challenges – and once-successful operating models of the past may not work in the future.”