New York--The head of Ernst & Young's insurance services division said some form of federal regulation of the insurance industry is inevitable and regulatory scrutiny of the industry will not let up until the industry proves it is completely transparent.

In a wide-ranging discussion on the insurance industry as it stands today, Peter R. Porrino, E&Y's global director of insurance services and Americas director for financial services, noted the industry has had its share of regulatory investigations in the past and that "until the insurance industry is proven clean I would expect continued scrutiny."

Ernst & Young, based in New York, is a global professional accounting and services firm.

Mr. Porrino said federal regulation "is inevitable at some level" and there will be more federal intervention in the future as the bigger insurers ask for it.

"I doubt it will be mandatory for every insurance company, but I do expect some options for companies to choose what is the best regulation [for them]," he continued.

Christopher J. McShea, senior actuarial advisor of the insurance and actuarial services group of E&Y, said Congress does not have the time or energy "to invest in this issue" at the moment after passage of the Terrorism Risk Insurance Act. It is also not an issue that is high on the agenda and won't be soon unless there is a public outcry for reform.

Michael Hughes, principal in the North American insurance and actuarial services practice of E&Y, noted the issue comes down to ease of doing business, efficiency and speed to market of insurance product. Having 50 individual state regulators and separate regulations in each jurisdiction is simply inefficient for major underwriters, he noted.

Discussing future prospects for the insurance industry, Mr. McShea said that despite the estimated $70 billion in catastrophe losses from the hurricanes that struck the Southern states along the Gulf of Mexico, there will be no major company insolvencies.

He said reported losses from Hurricanes Katrina, Rita and Wilma stand at $56 billion. However, the storm will affect some smaller insurers, but he did not speculate how many that might be.

On the question of future carrier consolidation, he said there would continue to be few mergers and acquisitions.

Mr. McShea pointed out that legacy issues continue to be a major stumbling block toward carrier consolidation. The only place where the merger and acquisition market may heat up is in Bermuda, where carriers are fighting for limited, experienced professionals and some new markets may seek to merge with more established companies for the long haul and as investors' exit strategy.

Discussing how insurers could be affected by factors outside of their underwriting, Mr. Hughes said if the avian flu were to become a pandemic it would have a deeper effect than losses from health and life insurance risk.

In a worst-case scenario, according to a report from the Congressional Budget Office, if the flu were to infect 90 million people, it would result in 2 million deaths. Under this scenario, due to the loss of personnel and productivity, the U.S. Gross Domestic Product would drop 5 percent, similar to post-World War II recession.

While the life and health insurance industry would be hit with underwriting losses, he said, the entire industry would be affected by a drop in investment income asset losses that would follow.

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Ernst & Young: Insurer Fed Controls Will Come

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