Insurers Must Focus on Opportunities, Avoid Price Wars to Stay Profitable

January 23, 2008

Margin compression and continued pricing erosion will put increasing pressure on the insurance industry to achieve top line objectives in 2008, according to industry analysts.

“With pricing becoming increasingly softer, leadership is going to become all the more important in 2008,” said Peter R. Porrino, Ernst & Young’s Global Director of Insurance.

Insurers need to make significant changes and seek alternative growth strategies if they are to remain competitive and survive in the challenging and complex business environment that lies ahead, according to the Ernst & Young’s Global Insurance Center.

“Today’s leaders must steer clear of price warfare and, instead, strive to uncover new business opportunities, make their organizations ever-more efficient and maximize their risk management operations,” Porrino added.

Ernst & Young identified six key issues in 2008 that will influence the property/casualty industry:

1. Striving for Growth: In spite of another year of great earnings, insurers will be challenged to sustain growth in 2008. EY expects margin compression to accelerate over the next 12 months. However, stronger balance sheets and an accumulation of capital will enable insurers to increase share buybacks, boost dividends, enter emerging markets and accelerate merger and acquisition activity. With these prevailing conditions, consolidation is more likely.

2. Operational Transformation: The search for growth and profitability is driving companies to focus on better business alignment and expense control. In 2008, insurers will also take a harder look at evaluating outsourcing and offshoring, particularly for back-office functions and customer-facing business processes. In addition, developing a formal strategic cost management program will be a critical facet of operational transformation.

3. Catastrophe Solutions: Impending soft market conditions will test each company’s ability to maintain underwriting discipline and achieve reasonable profits. EY believes that insurers should continue to invest in their ability to understand catastrophe risk and improve underwriting performance. This involves an investment in resources, technology and operational procedures. Only those who can find solutions within this fundamental framework will stay the course.

4. Financial Events: Over the last five years, insurers have increased their investments in alternative asset classes which has led to greater credit risk exposure. Now is the time to take action and focus on building risk infrastructure and creating more transparency commensurate with the nature of these important investments. Organizations that embrace the people, systems and processes to accurately comprehend and manage the risks of these asset classes may gain a competitive advantage.

5. Solvency II (SII): The implementation of SII may pose a sizeable challenge with far reaching implications for insurers. Besides the extensive improvements to systems, processes and data SII calls for, the convergence of accounting, risk and actuarial information may also pressure traditional actuarial practitioners to develop more sophisticated financial and risk management methodologies and more efficient deployment of capital.

6. International Financial Reporting Standards (IFRS): Regardless of the implementation date being delayed, the time for IFRS is now. Companies need to develop a plan that includes steps to assess the impact of the proposals on their financial statements, educate key employees and constituents, and evaluate the readiness of their organization for implementation.

“With market challenges only intensifying, there is a particularly fertile window of opportunity for companies to deploy capital and differentiate themselves through innovation,” said Christopher J. McShea, principal, Insurance Advisory Services, Ernst & Young LLP. “Challenges abound, and many will require new ways of thinking. Leaders who recognize the important changes in this industry, from tighter margins to new compliance and regulatory pressures, and devise inventive, cost-effective solutions for reacting to them, will be laying the groundwork for success in years to come.”

Source: Ernst & Young,

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