“We expect that commercial insurance lines, such as property, general liability, marine and energy, will be hit harder than personal lines, because of constrained business activity and the discretionary nature of some commercial coverage,” Moody's says. “Personal auto and home insurance lines will likely be more stable, given the mandatory nature of such coverage in major markets, although consumers may reduce premiums by choosing more limited coverage or higher deductibles.”

To combat the economic headwinds, Moody's expects insurers to increase premium rates, “particularly in loss-producing business lines,” and shift their business mix toward “more favorable markets, including higher-growth emerging economies,” such as Asian and Latin American markets.

“These growing economies have generated healthy growth in non-life insurance premiums for several years,” says Moody's adding that international P&C insurers have the capital to support diversification efforts into these higher-growth economies.

Rising rates and improved underwriting returns should help offset declining investment returns, Moody's says, although the ratings agency cautions that favorable underwriting trends can always be disrupted by catastrophe losses.

Moody's expects 2012's Superstorm Sandy to cause revisions in hurricane models, but even with those revisions, Moody's says carriers will likely revise their approach to insuring the Northeast. “Given the enormous concentration of assets in the region, the specter of unprecedented losses, and the challenges with modeling, it is precarious to base underwriting and risk management decisions solely on models,” the report says. “We expect some re/insurers to further augment their modeling with scenario/stress testing and to place greater emphasis on Northeast storms accompanied by high coastal surges.”

The ratings agency adds, “Northeast storms in back-to-back years, namely Hurricane Irene in 2011 and Sandy in 2012, will likely convince at least a few re/insurers to selectively prune or hedge their Northeastern U.S. exposures even before updating their models and related underwriting practices.”