NU Online News Service,Jan. 14, 2:43 p.m. EST

Competitive challenges in the property andcasualty industry will continue into 2011, and insurers will needto stay ahead of factors such as cycle management, technology, andregulatory and accounting changes to separate themselves fromcompetitors, Ernst & Young said in a recent industryoutlook.

P&C insurers will continue to deal withmany of the same factors that have fostered the recent soft marketconditions, E&Y said in its recent "2011 Outlook: U.S. Property/Casualty InsuranceIndustry" report.

Additionally, E&Y said recovery in thevalue of the industry's assets, access to relatively inexpensivecapital and adequate loss reserves—while generally positivefactors—are contrasted against the industry's underwriting andinvestment income pressures and will help drive competition throughat least 2011.

For companies looking to stand out from thepack, E&Y said insurers will have to operate effectively in asluggish U.S. economy. The economy, E&Y noted, is leading tolow investment yields and reduced net premiums. E&Y said thecompressed operating margins may lead insurers to "delay needed oradvantageous investments in substantive infrastructure improvementsin underwriting, marketing and customer service."

E&Y said companies that are making astuteinvestments in these areas despite the economy have achieved lowercombined ratios and are better prepared for the eventualreturn of a growtheconomy.

Insurers must also gain a firm grasp on pricingtrends through a more thorough understanding of the underlyingfactors. E&Y said, "Sophisticated insurers that understand thevarious factors pointing to a turn in the underwriting cycle gobeyond pricing tactics to position their companies advantageouslythroughout the cycle. Entering and exiting market segments andredeploying capital, where possible, can lead to wder profitmargins and stronger competitive positions."

Effectively managing excess capital will helpdefine long-term winners in 2011, E&Y said. "Long-term winnerswill be the insurers with a holistic approach to capitalmanagement," E&Y noted. "As the slower-growth environmentcontinues into 2011, insurers must look for ways to maximizecapital returns and find options that balance these returns withthe risks they present."

Some insurers are turning to acquisitions—whichincreased in frequency in 2010 compared to 2009. M&A shouldcontinue "at a moderate pace" in 2011, E&Y said.

Other insurers are deploying excess capitalinto technology and infrastructure improvements, E&Y noted.

E&Y recommended that insurers makeinvestments in next-generation predictive analytics that "identifytarget clients, profitable markets and superior distributionpartners." Such technology, E&Y said, has been effectivelyemployed in personal lines but is less mature in commercial lines.To be effective in this area, E&Y said senior managers mustmake a commitment to gain literacy in this discipline "orill-designed applications will serve to worsen the softmarket."

Anticipating and adapting to accounting andregulatory changes will also be important for insurers in 2011,E&Y said. Proposed accounting standards put forth by theFinancial Accounting Standards Board (FASB) have "implications wellbeyond financial reporting and investor relations," E&Y said,and could fundamentally alter how insurers design and price newproducts.

Meanwhile, regulatory changes in both the U.S.and Europe will have many consequences for the industry, some ofwhich are as yet unknown.

E&Y senior executives should "assess abroad range of business strategies to mitigate the challenges"posed by accounting changes and should engage regulators to shaperegulatory changes, rather than simply reacting to them.