Whether considering market dynamics or organizational functions,"transformation" may be the most important word for insurers in2014, according to a Deloitte analysis.

In its "2014 Property and Casualty Insurance Industry Outlook,"Deloitte says that insurers who wish to be market leaders in anincreasing competitive, more-tightly segmented and consumer-drivenenvironment need to be more adaptive in their thinking, culture andstrategic approach.

"Bottom line," says Deloitte, "property and casualty insurerswill be hard-pressed to achieve more consistent and higher rates orgrowth if they count on external conditions, usually outside oftheir control, to harden markets, increase premium volume andimprove investment income, while settling for superficial changesin their systems and standard operating procedures."

Click next to see six transformational questions that couldshape insurers' fortunes in 2014.

Can Insurers Leverage Emerging Technologies While StayingAhead of Privacy and Security Concerns?

More data than ever is available to insurers, but obstacles toleveraging it all include technological and liability challenges,says Deloitte.

As insurers accumulate more data, for example, they must contendwith privacy concerns and the growing threat of cybercrime.

Telematics remains a "rapidly evolving" field, but whileofferings are expanding, Deloitte notes the statements of somecarriers regarding underwhelming adoption by consumers, again, duein part to privacy concerns.

Smaller carriers are particularly challenged, says Deloitte, asthey lack sufficient data to effectively underwrite usage-basedinsurance policies. But the firm says "the playing field might soonbe leveled for smaller and regional competitors thanks toexternal-information aggregators."

Delivery of telematics systems is evolving as well, withDeloitte pointing to apps on mobile devices that can do the jobrather than devices installed in vehicles.

And telematics apps will not be the only focus for mobilecapabilities. Insurers, though apps, will likely look to "become amore regular part of their customers' everyday online lives, whiledifferentiating themselves with additional value-added services,"such as employing time and location data to issue safety alerts,vendor recommendations "and perhaps even loyalty-programdiscounts," Deloitte says.

Even with the enterprise-risk management challenges inherent incontending with the security and privacy issues that come withaccumulating more data and moving further into consumers' lives,Deloitte says technology transformations will be high on insurers'radars in 2014.

"Digital strategies that more closely engage policyholders andimprove customers experience are no longer aspirations, butnecessities in a mobile-driven culture and economy," Deloittesays.

Are Commercial Insurers Ready to Sell Direct andOnline?

"The distribution landscape is morphing into an increasinglydiverse mosaic," says Deloitte, pointing out that web aggregators,agencies and auction sites are creating more places for consumersto see multiple quotes from different carriers.

This could extend further into the realm of thecommercial-insurance sector. "While few opportunities exist todayin the United States to buy small-business coverage direct over theweb—other than in commercial auto and professional liability—that'svery likely to change," says Donna Schlegel, a director withDeloitte Consulting LLP.

Deloitte says a survey of small-business consumers it conductedfound that one-in-five would be "very likely" to buy direct overthe web, while another third would be "somewhat likely." Surveyedconsumers would expect a discount of 10-15% for buying direct, butDeloitte says this is in line with commission levels paid to agentsand brokers.

For insurers ready to offer commercial products direct andonline, Deloitte says upgrading underwriting, pricing andcustomer-service systems through predictive analytics isnecessary.

Will Insurers Invest to Build the Infrastructure Necessaryto Achieve Their Goals?

To jump on the trends mentioned by Deloitte on the precedingpages, such as telematics and offering small-business insurancedirect and online, insurers must overcome complex operationalchallenges, such as creating more analytics-driven,straight-through processing, the firm says.

Deloitte mentions claims transformation, and says this must gobeyond just a new technology system and must tap new analyticalgorithms "to better assess claims, correlate them against a widerarray of customer data and more effectively red-flag potentialanomalies that could indicate fraud…."

Carriers will have to focus on core systems such as claims andunderwriting, but will also need to recruit the talent necessary tofuel these transformations, Deloitte says. And insurers will notjust be competing with each other for this talent, but rather withother financial-services sectors as well.

Insurers may have to re-think performance-management andcompensation systems to compete. For example, Deloitte says,"Instead of viewing career growth as strictly a verticalprogression within a business unit, carriers might considercreating a more flexible career lattice, with interested anddeserving individuals given the opportunity and rewarded forextending their functional skills laterally across multiple linesof business, or being redeployed to departments where theirspecialized skills may be more valuable."

Will Regulatory Uncertainty Continue in 2014?

While there was much talk in 2013 of the potential impacts fromU.S. and foreign regulatory reforms, Deloitte says that on manyregulatory fronts the industry ended up stuck in waiting mode.

The uncertainty, says Deloitte, made strategic planningdifficult, and the firm expects that uncertainty to linger in2014.

While the Federal Insurance Office did release its long-awaited regulatory-modernization report at the end of lastyear, Deloitte's chief advisor for the Insurance Industry Group,Howard Mills, says there is likely to be little immediate impact,as most FIO recommendations require Congressional action, or counton states to make changes.

Deloitte notes that the environment of uncertainty could claimthe Terrorism Risk Insurance Act as a victim, and the firm warnsinsurers that they could face regulatory backlash if they move tolimit or abandon coverage should an extension fail to pass.

Insurers should also be ready to defend their underwriting andpricing practices, says Deloitte, as consumer issues could comeunder the spotlight in 2014.

Deloitte also says insurers will be bracing for a court rulingchallenging a U.S. Department of Housing and Urban Developmentregulationthat would use "disparate impact" as a metric for evaluating insuranceperformance. Mills says if the courts allow the use of thedisparate impact standard, "insurers may well be forced tore-evaluate valuable underwriting factors used to offer or priceinsurance despite their predictive accuracy."

Will the Presence of Alternative Capital IncreaseM&A Activity?

Deloitte notes that insurers' pricing power deteriorated some inthe 2013 second half after years of rising premium volume.Additional capacity in the reinsurance market from capital-marketplayers has had a hand in this, increasing competition and thusholding rates down.

The question, Deloitte notes, is whether these new players willhave the will to stick around in the event of a high-severity eventor a series of losses. But, should these players remain in themarket, Deloitte says the reinsurance market may be the first arearipe for consolidation.

Primary carriers, Deloitte says, are likely to focus on buildingscale or capabilities with their M&A activity.

Overall, rising valuations and overcapacity dampening organicgrowth could very well lead to a "more dynamic mergers andacquisition market in 2014," says Deloitte. "the time may be ripefor insurers to re-examine their strategic direction and determinehow an M&A might help them achieve their growth targets.

Can Insurers Transform Finance toBecome Internal Business Partners?

Deloitte says that in increasingly complex businessenvironments, finance functions at financial-services organizationsare expanding to support new products and markets, cost-reductioninitiatives and efforts to achieve appropriate risk-adjustedreturns.

The firm envisions a partnership where finance both supports andchallenges insurers' initiatives. "It is a shift from stewardshipto strategic thinking, with finance looking to create value byimproving the quality of business decisions while helping realizethe highest financial value for a particular initiative at what isconsidered to be an acceptable level of risk," says Deloitte.

This requires finance to work more closely with risk-managementfunctions, bringing together financial and operational data.

"Insurance players should take a more holistic approach to theirfinance-transformation initiatives, exploring how finance couldcreate greater value by playing the role of a strategist andperhaps catalyst in decision-making on broader company challenge,"says Deloitte.