o Prepare for changes in regulatory oversight.

o Address effective expense control.

o Rethink risk modeling.

o Watch for new M&A activity.

According to the report, the recent financial crisis compounded by a return to normal or above-average catastrophe loss levels may bring price reductions in the foreseeable future.

After a four-year period where technical and market pricing diverged, 2009 "appears to be reversing the trend," according to the report, which added that while this may not necessarily mean a return to a hard market, it signals a change in the dynamics of competition in the marketplace.

Pricing has been soft for the past four years in most property-casualty segments, E&Y said. Rate decreases during that period were offset by increased insured exposures resulting in virtually flat premiums, the report said.

While this changed with a softening economy in 2007, profitability held strong. Loss levels in 2006 and 2007 declined due to fewer catastrophe losses, loss reserve releases and favorable casualty loss frequency experience, the report said. In spite of ongoing rate competition, however, returns on capital reached record levels in 2007.

In 2008, catastrophes, pricing and the financial market crisis contributed to stress in the industry. Insured catastrophes totaled more than $50 billion and reduced loss reserve releases contributed to an overall deterioration of seven points in the combined ratio, E&Y said.

This level of cat losses is unlikely to significantly change overall market pricing, but the financial market crisis is exerting upward pressure.

E&Y said that early indications of pricing negotiations give strong support to at least a firming of the market in most lines. Insurer and reinsurer concerns over loss volatility and potential for mega-losses in highly developed cat-prone locations should contribute to price stabilization.

Additionally, E&Y said losses in directors and officers liability and errors and omissions products will result in significant price increases in those market segments.

The company said these factors would give risk to additional scrutiny by rating agencies and regulators. Surplus preservation, particularly against cat events, remains a critical strategy.

As well as a volatile environment for p-c insurers in 2009, it will also be a year when federal regulation could get a foothold in the insurance industry. Market trends, including federal involvement in banking and a momentum for change in the insurance regulatory structure, present additional challenges, E&Y said.

"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," according to the report.

It forecasted, "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."

Other issues are anticipated changes in accounting requirements and a need to rethink risk modeling. The report said p-c insurers will need to incorporate risk management lessons learned in 2008 into their risk management processes.

E&Y added that new activity with mergers and acquisitions is also on their radar. The financial crisis, it said, has created a confluence of events, resulting in an "unprecedented landscape" for mergers and acquisitions. "The government bailout of the world's largest financial institutions has placed its most prized assets on the auction block," E&Y said. "Additionally, other insurers are looking to focus on core business in order to free up capital and streamline operations."

The total number of insurance properties for sale currently exceeds the merger and acquisitions activity of the several years combined, whereas potential buyers are capital-constrained, E&Y said, adding that given current equity valuations, stock is not generally available "as currency to fund transactions."