NU Online News Service, Jan. 9, 3:16 p.m.EST

Challenged by a volatile underwriting cycle, a shaky economy andthe uncertain impact of new regulations, U.S. property and casualtyinsurers must respond by investing in core systems, understandingchanging consumer habits and using business analytics to addressdifficult top-line growth conditions, according to Ernst &Young.

In a 2012 outlook, “U.S. Property-Casualty Insurance Outlook,”E&Y outlines challenges the industry faces in the coming year.Aside from macroeconomic challenges, the report talks aboutregulatory uncertainties.

For example the report wonders what the future role of theFederal Insurance Office will be and how that will impact insurers.The report asks if the FIO will “develop into a federal supervisorof insurance, and if so, will this then meet the ‘equivalency’requirements under Solvency II?”

E&Y notes that if the U.S. fails to achieve equivalency withSolvency II, new capital requirements may be triggered forcompanies doing business in the Eurozone.

Additionally, the report says final standards for insurancereporting revisions from the Financial Accounting Standards Boardand International Accounting Standards Board are expected thisyear.

“At a minimum,” E&Y says, “these changes will necessitatesignificant systems’ updates. Given substantial increases inreported earnings volatility, insurers’ integrated risk and capitalmanagement strategies also may need revision.”

Changing consumer behaviors will also challenge insurers.E&Y says baby boomers will be driving with greater frequencythan today’s seniors as they are forced to work longer, younginsureds will require additional forms of communication, and thecountry’s changing ethnic mix will require new marketing strategiesto reach consumers.

To face these challenges, E&Y says insurers must:

• Increase investments in core systems to bolster growth andprofitability. “Pressures are mounting to transform core insurancesystems such as claims, policy administration, underwriting andbilling,” says the report. “The push for improvement comes fromcompetitors, heightened customer expectations and, above all,increasing costs to maintain and upgrade systems.”
• Anticipate, understand and address the impact of prospectiveregulations. Insurers must assess a regulation’s impact beforeimplementation and be prepared when the changes occur, says thereport.
• Comprehend and act upon changing insurance-buying behaviors.The report says insurers should consider a multi-channel strategy,both online and offline, that provides clear product information tonew buyers and a simplified renewal process for returningcustomers.
• Execute flexible approaches to manage uncertain economicconditions. “Diligent monitoring of changes in loss exposures andloss-development drivers will guide flexible adjustments to riskmanagement and risk pricing,” the report says.