The PricewaterhouseCoopers report suggests that successful insurers will be those that carefully weigh the following considerations:
Consolidation: The U.S. insurance market remains highly fragmented, and the strong underlying rationale for consolidation and restructuring means that merger and acquisition activity may accelerate rapidly, particularly as larger, better-capitalized firms consume smaller firms.
The end of innocence for retail investors: The faith of investors, who had become accustomed to high yields but were unaware of the related risks, appears to have given way to shock, disillusionment and caution. The pursuit of innovation appears to have been displaced by a focus on stability, risk management and demand for simpler, more straightforward and transparent policies.
Mounting uncertainty over tax: As debts and fiscal deficits mount, governments are looking for ways to increase their tax revenues. They will look closely at insurance companies, as the industry is a major source of potential tax receipts and has moved significant business capacity to other jurisdictions in recent years.
Organic restructuring: As a result of the financial crisis, many insurers have been forced to raise prices, restrict the pursuit of new business or withdraw from high risk and peripheral markets. As insurers withdraw from some geographic markets and scale back particular lines, opportunities for those that remain could sharply increase, leading to a significant reconfiguration in the list of leading players.
Rethinking financial reporting: Many insurance executives justifiably complain that their share prices fail to reflect the true level of value being created within their business. Without an industry consensus on a genuinely relevant, intelligible, and comparable basis of accounting and disclosure, insurers may find it increasingly difficult to compete for capital.
Blurring between public, private: The relationship between the public and private sectors could change as the government exerts a stronger influence over the insurance market as a result of bailouts, regulatory reform, and greater control over pensions, healthcare, trade credit and mortgage support.
Scrutiny of executive compensation: Two concerns raised by the financial crisis were the lack of understanding of risk at the board of directors’ level and compensation for senior executives. In theU.S., insurers are likely to base much more of their performance-related pay on risk-adjusted measures, aligned to their business strategy. They also expect to face tougher regulation of compensation.
Challenging prospects for reinsurers: While demand for reinsurance is likely to increase within emerging markets, this is unlikely to offset the decline in reinsurance buying in developed markets and may force many reinsurers to rethink how they sustain profitability and growth. The trend toward higher retention of straightforward risks could accelerate. As companies become more risk-aware through advances in enterprise risk management, they will be better able to choose what risks to retain and which to reinsure.
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