To say these are challenging economic times for insurers is to understate substantially the magnitude of the current situation. But it's not enough simply to recognize the challenges: Decisionmakers must understand today's economic trends and their causes in order to gain perspective into how those trends are likely to impact their company and industry sector. Only then can they mitigate losses and find new ways to capitalize on available opportunities.

In the "Economic Update and State of the Industry" session this afternoon at 1:45 p.m., Harry Starrett and John Johnston will offer a broad overview of the economy, particularly the financial crisis, with a perspective on how these economic realities likely will affect insurance companies across the spectrum of the industry. Starrett is client strategist at General Re - New England Asset Management, and Johnston is principal with UHY Advisors' Enterprise Risk Advisory Services Practice in New York.

"Everyone knows we're going through a traumatic period, and everyone can see the unprecedented government responses worldwide to try to correct it," Starrett says. "What we are going to try to do in this session is explore the fundamental root issues of what happened and what the ultimate shape of the recovery will be considering the impact of government programs, particularly over the next six to 12 months."

Marked Market Impacts

"Like it or not, we will see federal regulation to one degree or another of the insurance industry," he predicts, pointing to proposals to establish a systemic risk regulator to oversee all financial institutions as just one example. Although the Treasury Department has released details about its plans for the risk regulator's role in monitoring the financial system, that information has raised additional questions for insurers.

"There is a lot of interest and concern about what this systemic risk regulator truly is, what his or her authority will entail, and what it all means," Johnston says. Regardless of how--or whether-- this risk regulator ultimately materializes, economic conditions have raised the importance of enterprise risk management (ERM) for insurers.

"We will highlight some very recent developments in ERM and the acceleration in the trend of adoption by companies of more robust ERM programs," says Johnston. "Insurers are recognizing they need to be moving up in the ERM adoption and learning curve, if for no other reason than state and federal regulators and other external parties they deal with are pushing them in that direction."

The session plans to explore impacts of the economy on the life/annuities sector, including its strategies for dealing with the structure and pricing of products that have led to drains on earnings and surplus in light of double-digit investment market declines. On the P&C pricing side, at the same time Johnston expects the soft market to continue to present obstacles to growth, insurers simultaneously will be challenged to defend certain pricing mechanisms, such as credit scoring, that are sensitive to economic fluctuation.

"With households experiencing one or more income-earners being laid off, housing values dropping, and investment portfolios declining, there's a general consensus credit scores will be impacted as a result. If that happens, and if P&C insurers continue to use their preexisting credit scoring models, they are going to see pressure from consumer groups, regulators, and politicians, even though credit scoring is an important tool in the underwriting process," Johnston predicts.

Consumer Changes

"Asset prices have fallen," he says. "However, debt still is at elevated levels, and it has to be dealt with. Consumers' and investors' mindsets already have changed as a result, and you need to incorporate that reality into your economic forecasting."

Lower consumer spending caused both by asset depletion and high debt levels may result in a softer and slower recovery than in a normal post-recession period, which will impact insurers, as well. "This time around, it won't be the quick, market-driven turnaround we've become accustomed to seeing," Starrett says. "When we see growth return, it will be much more modest--perhaps two percent, whereas normally it's about six percent."

Ultimately, economic projections are a mixed bag for insurers, but understanding reality is the key to preparation. "It's not a great story with an 'all clear' signal and a definitive happy ending," Starrett says, "but it's the right story.

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Economic Challenges Highlight &quot;State of the Industry&quot; Session

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Economic Challenges Highlight "State of the Industry" Session