Insurers must seek alternative growth areas and stress efficiency to meet targets this year as profit margins get squeezed and prices continue to slide, a consulting firm advised yesterday.

Ernst & Young's Global Insurance Center's comments came in a report addressing the 2008 outlook for the property- casualty sector.

Peter R. Porrino, Ernst & Young' global insurance director and a co-author of the report said, "With pricing becoming increasingly softer, leadership is going to become all the more important in 2008."

Leaders, he counseled, must steer clear of price warfare and, "instead, strive to uncover new business opportunities, make their organizations ever-more efficient and maximize their risk management operations."

Among key points, in the report, E&Y said that despite projecting another year of great earnings, insurers will be challenged to sustain growth in 2008.

E&Y said it expects margin compression to accelerate over the next 12 months, but, stronger balance sheets and an accumulation of capital will enable insurers to increase share buybacks, boost dividends, enter emerging markets and accelerate merger and acquisition activity.

The firm predicted that with these prevailing conditions, consolidation is more likely.

E&Y noted that a search for growth and profitability is driving companies to focus on better business alignment and expense control. In 2008, E&Y said insurers will also take a harder look at evaluating outsourcing and offshoring, particularly for back-office functions and customer-facing business processes.

Additionally, the company said that, developing a formal strategic cost management program by insurers will be a critical facet of operational transformation.

Lowered prices in soft market conditions will test each company's ability to maintain underwriting discipline and achieve reasonable profits, E&Y said.

Insurers should continue to invest in their ability to understand catastrophe risk and improve underwriting performance. This involves an investment in resources, technology and operational procedures. Only those who can find solutions within this fundamental framework will stay the course, E&Y advised.

Over the last five years, the report said insurers have increased their investments in alternative asset classes, which has led to greater credit risk exposure.

It said now is the time for insurers to act and focus on building risk infrastructure and creating more transparency commensurate with the nature of these important investments.

Organizations that embrace the people, systems and processes to accurately comprehend and manage the risks of these asset classes may gain a competitive advantage in E&Y's view

In the firm's estimation, Solvency II, the updated set of regulatory requirements for insurance firms that operate in the European Union, may pose a sizeable challenge with far-reaching implications for insurers.

According to E&Y, besides the extensive improvements to systems, processes and data Solvency II calls for, the convergence of accounting, risk and actuarial information may pressure traditional actuarial practitioners to develop more sophisticated financial and risk management methodologies and more efficient deployment of capital.

Concerning International Financial Reporting Standards, E&Y said that regardless of the implementation date being delayed, "the time for IFRS is now. Companies need to develop a plan that includes steps to assess the impact of the proposals on their financial statements, educate key employees and constituents, and evaluate the readiness of their organization for implementation."

Christopher J. McShea, E&Y principal, Insurance Advisory Services and the other report author, said, "With market challenges only intensifying, there is a particularly fertile window of opportunity for companies to deploy capital and differentiate themselves through innovation."

"Challenges abound, and many will require new ways of thinking. Leaders who recognize the important changes in this industry, from tighter margins to new compliance and regulatory pressures, and devise inventive, cost-effective solutions for reacting to them, will be laying the groundwork for success in years to come."

Special Reports /

Insurers Must Find New Business, Efficiencies In ' 08: E&Y

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