New York--The head of Ernst & Young's insurance servicesdivision said some form of federal regulation of the insuranceindustry is inevitable and regulatory scrutiny of the industry willnot let up until the industry proves it is completelytransparent.

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

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

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

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

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

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

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

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

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

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

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

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

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