Challenging times ahead for US P/C insurers: EY

Margin compression and continued pricing erosion will put increasing pressure on the insurance industry to achieve top line objectives in 2008, according to Ernst & Young's (EY) Global Insurance Center.

"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.

"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."

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

1. 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.

“With pricing becoming increasingly softer, leadership is going to become all the more important in 2008.

Peter R. Porrino, Ernst & Young's global director of insurance

2. In 2008, insurers will also take a harder look at evaluating outsourcing and offshoring, particularly for back-office functions and customer-facing business processes.

3. 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.

4. 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.

5. The implementation of Solvency II 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. EY calls for the implementation of International Financial Reporting Standards. 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.