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

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 issues in 2008 that will influence the property/casualty industry.

• 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 conditions, consolidation is more likely.
• 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 off-shoring, 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.
• Impending soft market conditions will test each company’s ability to maintain underwriting discipline and achieve reasonable profits. EY believes insurers should continue to invest in understanding catastrophe risk and improve underwriting performance.
• Over the last five years, insurers have increased their investments in alternative asset classes which led to greater credit risk exposure. Now is the time to focus on building risk infrastructure and creating more transparency, says EY.
• The implementation of Europe’s Solvency II may pose a sizeable challenge for insurers, notes EY. 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.
• The analysts advised the time for International Financial Reporting Standards 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.