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

In its "2014 Property and Casualty Insurance Industry Outlook,"Deloitte says that insurers who wish to be market leaders inincreasingly competitive, more tightly segmented andconsumer-driven environment need to be more adaptive in theirthinking, culture and strategic 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 changes intheir systems and standard operating procedures."

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 its survey of small-business consumers found that1 in 5 would be "very likely" to buy direct over the web, whileanother third would be "somewhat likely." Surveyed consumers wouldexpect a discount of 10% to 15% for buying direct, but Deloittesays this is in line with commission levels paid to agents andbrokers.

Can Insurers Leverage Emerging Technologies WhileStaying Ahead of Privacy and Security Concerns?

More data than ever is available to insurers, but obstacles toleveraging it all include technological and liability challenges.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 having devices installed in vehicles.

And telematics apps will not be the only focus for mobilecapabilities. Insurers, through 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-program discounts,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,technology transformations will be high on insurers' radars in2014.

Will Insurers Invest to Build the InfrastructureNecessary to Achieve Their Goals?

To jump on the trends mentioned by Deloitte like telematics andoffering small-business insurance direct and online, insurers mustovercome complex operational challenges, such as creating moreanalytics-driven, straight-line processing.

Claims transformation is the key here, extending beyond a merenew technology system to tapping new analytic algorithms "to betterassess claims, correlate them against a wider array of customerdata and more effectively red-flag potential anomalies that couldindicate 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. Insurers will not just be competingwith each other for this talent, but rather with otherfinancial-services sectors as well.

Will Regulatory Uncertainty Continue in2014?

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

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

While the Federal Insurance Office did finally release itslong-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.

Insurers also should 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 Developmentregulation that would use "disparate impact" as a metric forevaluating insurance performance. Mills says if the courts allowthe use of the disparate impact standard, "insurers may well beforced to re-evaluate valuable underwriting factors used to offeror price insurance despite their predictive accuracy."

Will the Presence of Alternative Capital IncreaseM&A Activity?

Deloitte notes that insurers' pricing power deteriorated some in2013′s second half after years of rising premium volume. Additionalcapacity in the reinsurance market from capital-market players hashad a hand in this, increasing competition and holding ratesdown.

The question is whether these new players will have the will tostick around in the event of a high-severity event or a series oflosses. But, should these players remain in the market, Deloittesays the reinsurance market may be the first area ripe forconsolidation.

Primary carriers, Deloitte notes, are likely to focus onbuilding scale or capabilities with their M&A activity.

Overall, rising valuations and overcapacity dampening organicgrowth could very well lead to more dynamic mergers and acquisitionmarket in 2014, says Deloitte. The time may be ripe for insurers tore-examine their strategic directions and determine how an M&Amight help them achieve their growth targets.

Can Insurers Transform Finance to Become InternalBusiness 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 risk-adjusted returns.

The firm envisions a partnership in which finance both supportsand challenges insurers' initiatives. It is a shift fromstewardship to strategic thinking, with finance looking to createvalue by improving the quality of business decisions "while helpingrealize the highest financial value for a particular initiative atwhat is considered to be an acceptable level of risk."

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,"Deloitte adds.