The U.S. economy is always top of mind for property/casualtyinsurers—particularly when it remains sluggish for two or moreyears—but there are other issues for carriers to address if theywant 2011 to be successful.

Ernst & Young, in its 2011 outlook, lists six key issues forinsurers to address. Leading the way for IT leaders is predictive analytics.

"There's a lot of information available out there particularlyaround individual customer behavior," says Jay Votta, principal inthe insurance and actuarial advisory service for Ernst & Young."We believe, given the very slim margins in the P&C business,the companies that are going to perform the best are the ones thatcan take advantage of this new wave of information that's becomeavailable in the last few years."

Insurers able to mine such information and gather data tounderstand customer behavior can better determine what drivesbuying habits and how to react to those drivers, according toVotta.

Votta sees insurers using analytics in additional ways—such asclaims and new customers—but believes the greater emphasis will continue to be on underwriting.

"[Underwriting analytics] can spur top-line growth," he says."The claims applications are more of an expense reduction. Whenmargins are as slim as they are, that's compelling, but not to theextent that companies believe top-line growth can move stockprices."

The soft market conditions in the property/casualty arena haveforced insurers to examine their underwriting systems becausemargins are being squeezed tight, explains Votta. Insurers arelooking for opportunities to increase those margins because theydon't anticipate any rate relief in 2011.

Votta maintains there are multiple reasons why the industry isstuck in this soft market, but the most obvious is the fact thereis so much capacity in the industry. "Too many players and too muchcompetition are driving prices," he says.

Votta believes insurers need to invest inunderwriting and the motivation for this spending relates topreparation for the hardening of the market.

"With the consolidation that's going on in the industry thereare a lot of legacy systems—multiple systems—that make up acarrier's underwriting platform," he says. "In an attempt toconsolidate and streamline all these different systems they'vetaken on through mergers and acquisitions we see [consolidatingsystems] as the main driver of the investment going on in theunderwriting space."

Votta and E&Y can't predict the date when the market willfinally re-harden, but he feels it is imperative for carriers tounderstand what needs to happen before there is a change.

"There's over-capacity, yet the underwriting margins aren'twhere they were three or four years ago," he says. "Investmentincome results have not been where they were historically. Thereare a lot of signs where historically the market has turned interms of how thin margins can get and how low cash flow can go. ButI think what is holding back any turn is the amount of capital thatis sitting, particularly in the P&C industry. [Capital] has tobe less available for there to be any market change inpricing."

E&Y is among those that believe premiums will increase in2011, but Votta feels the reason for the boost is less aboutstronger rates and more about general economic activity, which hefeels spurs premiums.

"If you were rating policies based on sales or miles driven andthen the economy turned down the industry's premiums, you were hitwith a double whammy," says Votta. "Rates were softening and therewas less of an exposure base to apply those premiums to. We don'tsee premiums coming all the way back in 2011, but we certainly seean uptick in economic activity so we think that's what's drivingwhat little increase in premium we're going to see."

Votta doesn't have any prediction on how 2011 will turn outbecause of the cloud that hangs above the property/casualtyindustry every year: the threat of catastrophes.

"[Last year] turned out to be a good year for the industry as awhole because there weren't any [insured] catastrophes," he says."Investment results were certainly a lot better than in 2009."

Votta sees the same scenario playing out in 2011.

"If there aren't any cats, the underwriting results will begood, but they won't be as good as last year because rates havefurther deteriorated," he says." We believe the margins are thin tothe point where a major cat might very well be the trigger neededto harden rates."