"Because underwriting conditions are soft and continue to worsen, P/C insurers must prioritize controlling expenses and making their businesses as efficient as possible," said Peter R. Porrino, Global Director of Insurance, Ernst & Young's Global Insurance Center. "As the economy recovers, stronger insurers will no doubt find opportunity to grow organically and through acquisitions, while the weaker companies will likely be forced to exit less successful and non-core business."
Ernst & Young identified five key issues that will affect the P/C industry in 2010:
1. Live with pricing malaise: The recession has placed additional pressure on pricing, which has precluded any anticipated hardening of the market. In an environment where investment returns will not offset weak underwriting results, a critical success factor is the ability to deploy capacity in more profitable underwriting markets while controlling risks in less profitable ones. Insurers can get ahead of the pricing curve by maintaining strong underwriting and controlling coverage terms and conditions.
2. Operate successfully in a continually changing regulatory environment: In response to greater political pressures, P/C insurers must assess the combined effects of more intense regulations on their business models, capital requirements and governance structures. While federal and state authorities continue to debate oversight of insurance companies, hopefully, we can avoid a dual regulatory structure for each individual company. One thing that seems certain is heightened consumer protection efforts, which will affect how insurers design and market products and could increase operational costs.
3. Focus on core businesses and readdressing distribution strategies: As the economy stabilizes, insurers need to evaluate and implement tactical and strategic decisions about non-core businesses, products and distribution channels. They will continue to withdraw from non-core businesses in 2010, as they conserve capital and reallocate it among those businesses with the best chance of future success. This withdrawal creates opportunities for better-capitalized companies to increase market share as weaker competitors close or sell operations that add marginal value. Insurers must prepare for a new landscape where better-capitalized companies contribute to industry consolidation by focusing on what they view as their core businesses.
4. Build more risk management capacity with stronger governance and transparency: Insurers often do not have leading practices in place to identify and monitor the wide variety of risks they are facing. Risk monitoring cannot occur in the business units alone. Business units and CROs should work closely together to maintain processes to identify and escalate emerging risks to executive management and the board. Now is the opportunity to employ effective enterprise risk management (ERM) programs to further increase transparency across the business and encourage consistency in aligning risk tolerance with risk appetite. Insurers need to focus on understanding the links between risk management and capital management.
5. Improve the effectiveness of company infrastructure: Premium and expense growth is a key issue for the industry, which faces another year of eroding margins that will challenge many property-casualty insurers with uncompetitive operating cost structures. Short-term expense reduction initiatives may relieve current pressures, but they can also increase risks if cost cutting impairs operating effectiveness. Insurers must continue to reduce costs, but they must do so strategically, going beyond reducing headcount and re-engineering processes. This creates a path for greater sustainable value creation by examining the overall operating model and moving towards a transformation agenda.
