The economic uncertainty that plagues buyers of insurance does not bode well for the property/casualty insurance industry, experts are warning.
Ernst & Young, the global tax and business advisory firm, said it expects that low premium growth will persist through 2012, adversely affecting insurer profitability and resulting in the fifth consecutive year of negative performance.
Furthermore, increased regulation will force insurance companies to measure risk in new ways, affecting their capital and risk management strategies, the firm said in its new “Property/Casualty Insurance Industry Outlook” report.
“Insurers that employ flexible strategic responses in terms of capital and resources are best positioned to maximize market conditions,” said David Hollander, the Ernst & Young organization’s Global Insurance Advisory leader.
Hollander said that despite the current climate, there are steps insurers can take to “better understand changing insurance buying behavior” and use business analytics to achieve a competitive advantage.
In particular, Ernst & Young has identified five strategies that it recommends U.S. property/casualty insurance companies explore in 2012 to improve their chances for success:
- Execute flexible approaches to manage uncertain conditions. To implement fluid strategies in an environment of multiple uncertainties, an insurer’s operational capabilities, infrastructure and corporate culture must support flexible, rapid and well-governed decision-making, thereby assuring agile performance with accountability. Diligent monitoring of changes in loss exposures and loss development drivers will guide flexible adjustments to risk management and risk pricing.
- Anticipate, understand and address the impact of prospective regulations. Insurers must assess the impact of new regulations and accounting changes prior to implementation. They should consider enhancing the sophistication, articulation and deployment of their risk management standards and related systems, as compared to their current regulatory and reporting environments. Insurers that fail to appreciate the impact of regulations and new accounting standards could find that a potentially higher cost of capital may derail their competitive strength.
- Comprehend and act upon changing insurance buying behaviors. Marketing success is built on a clear understanding of the customer. In terms of tomorrow’s customers, their characteristics, buying behaviors and risk profiles will likely bear little resemblance to those today. Identifying, assessing and capitalizing on the characteristics of tomorrow’s customers underscores the need to tailor products, services and distribution channels to their specialized needs.
- Increase investments in core systems to bolster growth and profitability. Pressures are mounting to transform core insurance systems such as claims, policy administration, underwriting and billing. The push for improvement comes from competitors, heightened customer expectations and, above all, increasing costs to maintain and upgrade systems. Faced with limited investment alternatives yielding an attractive return, insurers are investing in themselves to position their operations for growth and improved profitability.
- Apply business analytics to address difficult top-line growth conditions. In this uncertain economic environment, insurers that apply business analytics across the value chain can glean deeper information on customer markets, underwriting segment profitability and claims management. These insights can then guide both strategy development and execution. More refined business analytic tools are now available to insurers and there are more external data sources to feed into the models, promising much deeper analysis for decision-making purposes.
“As the U.S. property/casualty industry continues to confront a difficult climate, it is also challenged by regulation and an uncertain governance and compliance agenda,” said Shaun Crawford, Ernst & Young’s Global Insurance Sector leader. “In this environment, insurers should consider strategic approaches that are flexible – capable of responding to economic pressures as they emerge, intensify or weaken. In 2012, companies that invest in core systems, information resources and employ skillful management processes, stand the best chance of succeeding in these challenging times.”
The complete “Property/Casualty Insurance Industry 2012 Outlook” report can be found at www.ey.com/insurance.