Ernst & Young 2009 Insurance Outlook – US Property/Casualty

Ernst & Young’s 2009 Insurance Outlook for the US property and casualty (P&C) industry initially notes that the P&C industry is emerging from the turmoil in financial markets with significant isolated damages, but so far no serious general impairment.
This Outlook discusses these key considerations for US P&C insurers in 2009:
•       Redirect focus on premium pricing;
•       Monitor claims inflation risk;
•       Prepare for changes in regulatory oversight;
•       Prepare for changes in accounting requirements;
•       Address effective expense control;
•       Rethink risk modeling; and
•       Watch for new M&A activity.
Looking ahead, this may be the beginning of a transitional if not transformational environment for the P&C industry. It is a time when challenges in the competitive landscape can become opportunities for the efficient and well-prepared.
Because of the recent financial crisis, compounded by a return to normal or above-average catastrophe loss levels, price reductions are likely over for the foreseeable future. At the same time, though, the environment for P&C insurers through 2009 is likely to continue a volatile pattern that drives claims costs. In an inflationary environment, P&C insurers as third-party payers or in adversarial claims settlement positions are in a poor negotiating position relative to larger purchasers of commodities or services. Medical cost inflation, while unpredictable, will impact product lines.
Momentum for change in the insurance regulatory structure is building, and the near-term uncertainty about the outcome presents challenges for the industry. It is almost certain that the P&C industry will face increased regulation as an outcome of the current crisis in the financial services industry. Regulation is likely to be more intrusive, encompassing more continuous monitoring of activities and financial performance, perhaps with higher standards of solvency over the longer term.
Accounting issues will be critical in 2009 and beyond as companies prepare to adopt a new financial reporting platform. P&C insurers are beginning to prepare for the anticipated change to a market-consistent framework. Management must keep up with their peers in adopting systems and information capabilities to respond to these changes as they unfold.
For most of this decade, expense ratios have been rising steadily. The pace of cost increase indicates that real inefficiencies are accumulating and are not simply a function of slowing premiums. Many of the largest P&C insurers undertook cost-reduction initiatives during the second half of 2008. However, a longer-term, sustainable approach to insurance spending must be applied to make a real difference.
In the year ahead, P&C insurers will need to incorporate risk-management lessons learned, particularly lessons learned in 2008, into their risk-management processes. P&C insurers will want to focus on acquiring additional information from risk models, but the effort to improve models will fall flat without supervision by managers who are accountable and who are knowledgeable about real-world trends and influences.
The financial crisis has created a unique confluence of events resulting in an unprecedented landscape for insurance mergers and acquisitions. The current economic conditions may drive down current sales prices for insurance properties, making 2009 one of the most significant years in the insurance M/A market.