NU Online News Service, Jan. 13, 3:34 p.m. EST

The property and casualty industry faces an ongoing soft market, uncertain regulatory landscape, and possible health care reform impacts in 2010, an Ernst & Young outlook said.

According to the consulting firm's Global Insurance Center 2010 U.S. Property-Casualty (P/C) Insurance Industry Outlook, the industry emerged from the financial crisis "relatively unscathed."

Capital is still strong, E&Y said, "with the negative impact of 2008 capital market losses substantially concentrated among very few players."

But companies need to be prepared to deal with the ongoing soft market. "The recession has placed continued pressure on pricing, with reduced insured exposures due to a weak economy and insureds' increasing retentions," the outlook cautioned. "This has forestalled any anticipated hardening of the market."

E&Y said both commercial and personal lines are seeing reduced exposures and rising combined ratios, with the commercial side experiencing combined ratios over 100 in 2008.

The outlook said that for insurers dealing with the soft market, "in an environment where investment returns will be unable to offset weak underwriting results, a critical success factor is the ability to deploy capacity in more profitable underwriting markets and control risks carefully in less profitable ones."

On the regulatory front, E&Y said pace of change is impacted by the debate over the "relative roles of state versus federal oversight of solvency, insurance products, and processes."

"The taxation of insurance companies in the name of additional sources of revenue for federal and state governments could be an additional regulatory factor, as well as a spillover from the health care debate--the possible repeal of the McCarran-Ferguson Act," which provides insurers certain exemptions from antitrust law.

Other health care implications could affect p&c insurers as well. E&Y wrote, "It will be several years before many of the structural implications of the health reform go into effect. However, workers' compensation will be impacted regardless of what form the legislation takes. For example, provider fee schedules are based on Medicare rates; any changes in Medicare reimbursement will affect workers' compensation payments over time."

The outlook also urged insurers to focus on core businesses and re-address product and distribution strategies.

E&Y predicted, "Insurers will continue withdrawing from non-core businesses in 2010, as they conserve capital and reallocate it among those businesses with the best chance of future success." Better capitalized companies can seize this opportunity to increase market share in those areas, noted the outlook.

Other E&Y recommendations for insurers include building more risk management capacity with stronger governance and transparency, and improving the effectiveness of company infrastructure.

"The relative importance of efficiency as a business priority often re-emerges during recessions and other conditions where margins are compressed," the outlook stated. "While the concept can be simplistic, the application and its effective measurement can be complex.

Special Reports /

E&Y 2010 Outlook Highlights Soft Market, Regulatory Landscape

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