The property-casualty insurance industry in 2007 will needbetter capital management and more innovation, according to Ernst& Young's Global Insurance Center.

The industry in 2006 exhibited strong resiliency with advancesin the form of stronger balance sheets, better controls,improvements in risk management and continued advances in pricingtechniques, the company said in a statement.

Pete Porrino, Global Director of Insurance, Ernst & YoungGlobal Insurance Center, said: "The past four years have beenmarked by unrelenting regulatory scrutiny, unparalleledcatastrophic losses and an incredibly vibrant hard market," andthese factors "have created an unusual window of opportunity,attracting new competitors to the market that have a different viewof risk and desire to innovate."

Ernst & Young said among key issues in the coming year forthe p-c market are maintaining and managing profitability bylooking at three key areas: the difference between premium and losstrends, cost control and capital management.

Forward-thinking companies, Ernst & Young said, areaggressively managing quality and profitability across productlines, deploying capital judiciously and tackling rising costs.

Insurers, the company said, are shifting from growth toinnovation as a declining market is emerging and creating anopportunity for the innovative deployment of capital and marketdifferentiation.

According to Ernst & Young, the Bermuda sector foreshadowsthe innovation trend with new market entrants establishingnontraditional organizations, launching competitive new productsand pursuing underserved market segments.

According to the company's analysis, opportunities remain forincumbents in the areas of underwriting, catastrophe exposuremanagement, capital management and expense management.

The firm noted lingering post-2005 and 2006 catastrophe marketissues with policyholders in coastal communities still strugglingwith claim disputes, limited availability of products and dauntingprice increases.

It said that "in the midst of uncertainty and regulatoryintervention, companies will need to manage the 'risks' ofrecovery."

Ernst & Young foresees that reinsurance will be aparticularly innovative market in 2007 that will push the limits onthe use of advanced analytics at the transaction level as well asin the capital allocation process and that the profitability of the2006 property cat book will be a particular object of interest.

Hedge funds, having entered the market, will make it moredynamic, said Ernst & Young.

The complex regulatory and reporting environment for insurers,driven, in part, by Sarbanes Oxley and the impending Solvency IIframework, sees carriers moving toward "a convergence of riskmanagement activities to better achieve well-controlled andtransparent management of risk and capital on a cost effectivebasis," the company said.

Mr. Porrino said it is likely that 2007 will be a more complexand difficult business environment. "The winners will be thosecompanies that can execute on their business strategy, manage theircapital judiciously, and be innovative during a period ofanticipated stagnant or declining profitability."