The P&C industry should benefit in the short term from arecovering economy in 2013, but the longer-term outlook depends onhow individual carriers respond to a series of more fundamentalchallenges.

Indeed, regardless of the state of the economy, carriers canexpand their business and improve their profitability not just bystaying focused on the immediate obstacles they may come across interms of the business or regulatory climate but also by continuallyreinventing themselves so they are positioned to thrive over thelong haul.

Many carriers have already made such a proactive approach partof their standard operating procedure. They continually re-examinehow they do business, realizing that achieving innovation acrossthe enterprise is part of an ongoing journey—not a finaldestination.

They regularly reassess their product development andtarget-marketing strategies. They initiate transformations in theirtechnology infrastructure, particularly when it comes tounderwriting, policy administration and claims systems.

They periodically re-evaluate their distribution options, bothto fine-tune the productivity of their existing sales force as wellas to explore the possibility of adding new channels to reachprospects with different needs and preferences.

The driving force behind such innovative carriers is theircommitment to differentiate themselves and keep improving thecustomer experience so they don't have to compete on price alone.In short, they constantly look to add value to the equation fortheir clients to bolster both acquisition and retention rates. Thatmeans adapting to the evolving demands of insurance consumers,especially when it comes to meeting their rising expectations for24/7 service via multiple channels.

The same message on adaptation applies internally as well asexternally. Leading insurers realize that despite the increasingimportance of technology, insurance is still a people business.Cutting-edge carriers should therefore continuously adapt to theneeds of an increasingly diverse and ever-evolving workforce.

To accomplish this, insurers must make adjustments to developand retain the top talent they already have within the company. Butthey also need to recruit the most attractive candidates—not justfrom outside the organization but from other industries as well toimport the skill sets required to keep an insurer in the forefrontof innovation.

Such changes are not easy to contemplate or implement. But thelonger strategic decisions and initiatives are delayed, the moredifficult it might be to catch up with—let alone surpass—thecompetition over the course of what promises to be a turbulentdecade ahead.

As we contemplate the competitive landscape,senior-level insurance executives are likely to confront a seriesof interdependent challenges that should be addressed for carriersto thrive, not just in 2013 but well beyond. We address theseissues in greater detail in a pair of 2013 Outlook reports—one forP&C, and the other for Life and Annuities—available online to readers.

Some of these issues are financial, relating to how insurers cankeep boosting their top and bottom lines, whether that meansconsidering alternative investment options in response to lowinterest rates or taking advantage of merger or acquisitionopportunities to access new markets and achieve economies ofscale.

Some are related to marketing, in terms of how carriers mightmore effectively reach and serve clients, such as capitalizing onthe fastest-growing segments in a slowly recovering economy ormaking innovation part of their DNA when it comes to productdevelopment.

A number involve management conundrums, including how to betterleverage technology or turn enterprise risk management from acompliance requirement into a game-changing differentiator.

Meanwhile, regulatory issues inevitably come to the forefront,challenging carriers to adapt to the changing rules of the game,both here in the United States as well as globally.

There are undoubtedly additional threats and opportunities onthe radar of individual carriers, and each year brings its ownunforeseen problems to address.

But while it's relatively easy to identify the challenges facinginsurance companies, it's a lot harder to determine how anindividual player should respond. Each course of action has its ownrisks and rewards, but perhaps the one certainty is that doingnothing to change how an insurer operates is usually not a viableoption over the long term.

Even carriers that consider themselves successful under theirown version of the status quo should regularly reassess thepossible vulnerabilities of their business model in a rapidlyevolving economy and insurance marketplace. Each challenge theyface is both a potential threat as well as a potential opportunity,depending on how a particular carrier chooses to address it.

One factor in favor of insurers is that unlike the day-to-dayeconomic conditions in which they operate, these issues are usuallyvery much within their control, leaving them ultimately in chargeof their own destinies.