While three separate analyses of the insurance and reinsurancemarkets in 2012 were unable to determine whether the industry willbe able to sustain recent rate increases, all agree that theindustry will face challenges this year ranging from the economy tothe implementation of new regulations.

In a Jan. 9 outlook onpersonal-lines and commercial-lines insurers, ratings agency A.M.Best says the personal-lines segment continues its solidperformance, with Auto exhibiting “adequate and stablereturns.”

But Best notes that personal-property lines are extremelyvolatile “due to the effects of continued weather-relatedlosses.”

Because Auto makes up 60 percent of the personal-lines business,personal lines are regarded as stable overall, Best says. However,property’s performance has put a “drag on overall results,” meaningthat “there is less room for additional deterioration in results”than in the past.

Best says it believes “the personal-lines segment is adequatelypositioned to handle a ‘normalized’ weather year without acorresponding change in outlook.”

On the commercial side, Best gives an overall negative outlookrating, saying it believes that in 2012, “negative rating actionswill outnumber positive actions during the year.”

While prices are on the upswing for the first time in fiveyears, Best says it is skeptical “that a long-term reversal inmarket pricing has arrived,” adding that cycles come in years, notquarters.

A fragile economy will test the buying power of Main StreetAmerica’s businesses, which are still struggling. Large accountswill continue to resist increases, but Best says pricing momentumis expected to be on the upturn for some lines, such as CommercialProperty and Workers’ Compensation.

In a separate outlook, also released on Jan. 9, Best says theglobal-reinsurance market seems “poised for a turn,” but warns thatsoft-market pricing could still return in a hurry.

Best says, “Over the past five years, reinsurers generallyexperienced declining demand for reinsurance capacity while primarycompanies increased retentions across the board.”

Recent global catastrophes, volatility of assets andcatastrophe-model changes, though, have conspired to change primarycompanies’ perception of risk, which has increased demand forreinsurance, Best adds.

“This increasing demand for reinsurance cover has helped tobolster current pricing for property catastrophe-related business,”says Best, noting that it expects improved pricing, terms andconditions that will support low double-digit returns on equity forreinsurers in 2012.

But the ratings agency cautions that the pricing increases maybe short lived. “History has proven that the market has a shortmemory, and if the sting of recent loss events quickly fades, thesoft market may return,” Best says.

Best gives the reinsurance industry a stable outlook for now,but says if soft-market pricing does re-emerge in 2012, the capitalstrength of the segment would slowly erode—and the agency wouldconsider revising the ratings outlook to negative, “as pressure onratings would be expected to mount.”

Reinsurers still face a number of challenges, Best continues,including pricing pressures, low investment yields and a “limitedcushion of loss-reserve releases available to mask deterioratingearnings.”

Meanwhile, an Ernst & Young industry outlook released inDecember outlines the challenges it sees facing the insuranceindustry in 2012.

Aside from well-publicized macroeconomic challenges, the reportnotes several regulatory uncertainties. For example, the reportwonders what the future role of the Federal Insurance Office willbe, and how that will impact insurers.

It also says final standards for insurance-reporting revisionsfrom the Financial Accounting Standards Board and InternationalAccounting Standards Board are expected this year.

Changing consumer behaviors will also challenge insurers.E&Y says baby boomers will be driving with greater frequencythan today’s seniors, as they are forced to work longer; youngerinsureds will require additional forms of communication; and thecountry’s changing ethnic mix will require new marketing strategiesto reach consumers.

To face these challenges, E&Y says insurers must:

• Increase investments in core systems to bolster growth andprofitability.
• Anticipate, understand and address the impact of prospectiveregulations.
• Comprehend and act upon changing insurance-buyingbehaviors.
• Execute flexible approaches to manage uncertain economicconditions.