A London-based independent market analyst said the current financial turmoil could lead to an increase in insurance prices.

The Datamonitor's analysis written by Jonathan Steiman, analyst, financial services technology, remarked, "Although it is too soon to tell, the recent events could mark the beginning of the end of the soft market."

While premiums of nearly all commercial lines as well as some personal lines have been falling for three years and this "in combination with withering investment income has had a crushing effect on the industry's bottom line, it could change," Datamonitor suggested.

It was noted that many times after a market shock, as for example, the September 11, 2001 terrorist attacks, the industry gains greater pricing power.

Datamonitor added that American International Group, in a "weakened and distracted" state since it was forced to give the government a 79.9 percent interest, could cause a supply shock that puts upward pressure on prices. The firm cautioned, however, that "a shaky economy" may temper demand, making it difficult to pass on higher premiums.

Furthermore, it noted that insurers have a chance to gain market share from AIG.

While AIG's insurance units are solvent, the market has another perception, Datamonitor said, quoting a survey of 1,000 insurance agents and brokers that found 44 percent of AIG policyholders have requested to move their account. Some 62 percent of the producers said they expect to place less business with AIG.

"This shift in consumer and agent perception presents competing insurers with a great opportunity," according to the analysis.

Last week's financial turmoil will also have a long-term effect on technology strategies, Data monitor said.

Datamonitor said in its survey of 200 global insurers conducted in the first half of this year that 61 percent and 47 percent of non-life and life insurers, respectively, said they were planning to increase investment in risk management and compliance systems in the 2009.

The firm called these "healthy figures" and said it anticipates even greater spending in light of the recent events.

Vendors must react to this demand by not simply providing more of the same but by designing innovative ways to re-engineer the risk management practices of insurers. "The old assumptions simply do not work," Datamonitor advised.

It noted that "safe" bets, like Lehman Brothers debt, proved poisonous, and said the current tools failed to account for "the labyrinth of unregulated and loosely agreed-to credit default swaps."

While new regulations should help mitigate these problems, next-generation risk management systems must be able to quickly capture and evaluate complex transactions from every corner of the enterprise, Datamonitor counseled.

Vendors have an opportunity to differentiate themselves by grasping the new realities of risk and designing relevant solutions, the firm said.

Datamonitor said the past week's events will have a long-term effect on insurers' technology strategies and it expects they will look to increase their investment in risk management and compliance systems in 2009 by far more than they planned in the first half of 2008.

The firm said, "While the only certainty in today's market is uncertainty, Datamonitor believes that AIG was a one-of-a-kind event within the insurance sector," noting that AIG, unlike other insurers operating within the life and non-life market, was heavily involved with credit default swaps (CDS), unregulated quasi-insurance products that protect against bond defaults.

Datamonitor noted that on Sept. 16, MetLife had announced it had $800 million of investments between AIG and Lehman Brothers and is "continuing to assess the recoverability of these investments." The Hartford also has exposure, particularly $127 million in subordinated Lehman debt.

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Finance Crisis Might Boost Insurance Prices, Says Analyst

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