Insurers are cautiously optimistic about the potential for morerobust economic expansion as well as regulatory relief followingthe election of what's perceived to be a more business-friendly administration in Washington,but fundamental obstacles remain that could undermine theirprospects for top- and bottom line growth.

That was the impression I came away with after listeningrecently to pronouncements from panelists and lively coffee breakbanter during the industry's annual family reunion — theProperty-Casualty Insurance Joint Industry Forum.

Related: 2017 P&C market outlook[infographic]

Organized by the Insurance InformationInstitute, the forum brings together association leaders fromacross the business — carriers and intermediaries, technologydevelopers and statistical agencies, research and regulatoryorganizations, as well as many of the top insurer and reinsurerCEOs. During this latest gathering, it was no surprise the maintopic of conversation on and off the formal program was how theeconomy in general, and the insurance industry in particular, waslikely to perform in 2017 and beyond with newfederal leadership in place.  

At last month's gathering, there was genuine excitement in theroom about the possibility of regulatory and tax reform, whichcould lower insurer expense ratios and bolster their bottom lines.The likelihood of rising interest rates raised spirits as wellafter years of historic lows that have undermined insurerinvestment income and profitability.

Last but not least, attendees were heartened by analystspredicting an acceleration in economic expansion, especially ifcampaign promises calling for significant infrastructure spendingare realized. One analyst at the forum observed that even anadditional 1 percent of GDP growth would likely translate intobillions of additional premium dollars for carriers.

Downside risks also cited

However, despite the generally positive mood at the forum,caveats were also raised about potential downside risks. Forexample, rising interest rates — while good news for the investmentside of the house — could be counterproductive in the long term ifhigher borrowing costs end up discouraging loans for new homes,vehicles, and business expansion, thereby cutting down on insurableexposure growth.

In addition, higher interest rates would likely strengthen thevalue of the dollar, possibly putting a crimp in U.S. exports —which could also suffer if threats to impose new tariffs arecarried out. There were concerns raised as well about whetherefforts to dismantle the Affordable Care Act might cause damaging"turbulence" in the health care sector, which accounts for nearlyone-fifth of the American economy, according to data from theCenters for Medicare and Medicaid Services.

Related: Marsh's top 10 financial & professional markettrends for 2017

Others noted that solutions are still lacking to address moresystemic problems that could hinder the insurance industry'slong-term growth. Among the issues raised was the aging American workforce and looming laborshortage (particularly if immigration is inhibited), the skillsgap (especially in tech-related and data science jobs), ongoingdisruption in European economies (most notably the fallout fromBrexit), as well as the slowdown in China's economicjuggernaut.

Insurers urged to be proactive on transformations, talent

In any case, rather than sitting back and waiting to see how thenew administration's policies might or might not affect theeconomy, the regulatory environment, and the industry's growthpotential, those at the forum emphasized that insurers need to beproactive and seize control of their own top- and bottom-linedestinies. That means:

Innovating to improve risk segmentation, pricing, and thecustomer experience.

Leveraging new technology to streamline operations, improveefficiency, and cut costs.

Recruiting the talent required to pull off a game-changingdigital transformation.

To generate more organic growth, insurers need to becomemasters at digital marketing, sales, distribution, and service.(Photo: Bigstock)

Increasing pressure from expense management

With margins shrinking, forum speakers warned that insurers arelikely to face increasing pressure when it comes to expensemanagement. Indeed, half of those surveyed at the event expectheightened merger and acquisition activity to be driven by the needto achieve economies of scale.

Related: What's on the horizon for P&C insurers in2017?

As for the top line, insurers were told that to generate moreorganic growth they need to become masters at digital marketing,sales, distribution, and service. That's a tall, but necessaryorder with so many consumers doing much of their business onlineand becoming accustomed to life in an increasingly virtualeconomy.

As noted earlier, the dearth of human capital was also much onthe minds of insurers in attendance. Forty-three percent of thosesurveyed at the forum agreed that "attracting the next generationof talent and skills" is the most important issue for the industrythis year — the highest response rate by far.

Many at the event wondered aloud whether insurers have thebandwidth and/or the technical expertise to pull off digitaltransformations before others outside the business eat their lunchby deploying "better mousetraps" in the form of new business andoperating models.

Skeptics in the audience were asked to ponder the fact that thenation's largest ride-sharing service and biggest temporary housingcompany do not actually own any of the properties being used bytheir customers, demonstrating how nontraditional disruptors canoverwhelm legacy industries practically overnight.

One speaker said taking on the characteristics of an InsurTechcompany, at least in terms of mindset and culture, might helpalleviate the talent shortage by attracting those currently turnedoff by the "boring" traditional insurance business, but perhapsturned on by the opportunity to transform an industry.

Role of state insurance regulators

State insurance regulators have their role to play as well.While continuing to focus on solvency and consumer protection,there was talk at the forum about how regulators are working tobecome more comfortable with analytics, InsurTech solutions, andnew business models so they can properly oversee insurers lookingto transform into more cost-efficient, customer-centric entities.Lots of disruptive developments don't necessarily fit into existingregulatory toolboxes, such as peer-to-peer insurance groups,attendees were told.

In the meantime, those at the forum were warned by their fellowsto expect a lot of uncertainty and volatility this year, whether interms of economic growth, interest rates, the equity markets, taxand regulatory policy, tech development, or disruptive threats. Inother words, fasten your seatbelts, as it could be a bumpy rideahead.

Related: Bring on the 'Year of the WildCard'

Sam J. Friedman ([email protected]) isinsurance research leader with Deloitte's Center for FinancialServices in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.