The property-casualty insurance industry in 2007 will need better capital management and more innovation, according to Ernst & Young's Global Insurance Center.
The industry in 2006 exhibited strong resiliency with advances in the form of stronger balance sheets, better controls, improvements in risk management and continued advances in pricing techniques, the company said in a statement.
Pete Porrino, Global Director of Insurance, Ernst & Young Global Insurance Center, said: "The past four years have been marked by unrelenting regulatory scrutiny, unparalleled catastrophic losses and an incredibly vibrant hard market," and these factors "have created an unusual window of opportunity, attracting new competitors to the market that have a different view of risk and desire to innovate."
Ernst & Young said among key issues in the coming year for the p-c market are maintaining and managing profitability by looking at three key areas: the difference between premium and loss trends, cost control and capital management.
Forward-thinking companies, Ernst & Young said, are aggressively managing quality and profitability across product lines, deploying capital judiciously and tackling rising costs.
Insurers, the company said, are shifting from growth to innovation as a declining market is emerging and creating an opportunity for the innovative deployment of capital and market differentiation.
According to Ernst & Young, the Bermuda sector foreshadows the innovation trend with new market entrants establishing nontraditional organizations, launching competitive new products and pursuing underserved market segments.
According to the company's analysis, opportunities remain for incumbents in the areas of underwriting, catastrophe exposure management, capital management and expense management.
The firm noted lingering post-2005 and 2006 catastrophe market issues with policyholders in coastal communities still struggling with claim disputes, limited availability of products and daunting price increases.
It said that "in the midst of uncertainty and regulatory intervention, companies will need to manage the 'risks' of recovery."
Ernst & Young foresees that reinsurance will be a particularly innovative market in 2007 that will push the limits on the use of advanced analytics at the transaction level as well as in the capital allocation process and that the profitability of the 2006 property cat book will be a particular object of interest.
Hedge funds, having entered the market, will make it more dynamic, said Ernst & Young.
The complex regulatory and reporting environment for insurers, driven, in part, by Sarbanes Oxley and the impending Solvency II framework, sees carriers moving toward "a convergence of risk management activities to better achieve well-controlled and transparent management of risk and capital on a cost effective basis," the company said.
Mr. Porrino said it is likely that 2007 will be a more complex and difficult business environment. "The winners will be those companies that can execute on their business strategy, manage their capital judiciously, and be innovative during a period of anticipated stagnant or declining profitability."
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