Even though the economic recovery is slow and sporadic, property and casualty insurers are poised for growth this year if they take proactive steps to turn challenges into opportunities.

Unable to depend on investment income due to low interest rates and a volatile securities market, carriers have been paying closer attention to underwriting—often with the support of new and improved predictive analytics—and raising prices for coverage accordingly.

As a result, premiums on average have been on the rise in the middle-single digits for both personal and commercial lines, with accommodations made up or down depending on the individual risk. This trend is likely to continue and perhaps gain momentum this year, particularly in catastrophe-prone areas.

At the same time, insurers have benefitted from growth in insurable exposures over the past two years as private employers continue to add workers, and as housing and auto sales rebound. The combination of stricter underwriting, higher prices and an expanding exposure base should generate premium volume growth for many carriers in 2013.

However, while the soft market for insurance may be over, the hardening of the market is likely to remain modest. Premium rates and overall volume are both on track to rise this year, but organic growth will not necessarily be quick—or high enough to satisfy many shareholders looking for a greater return on equity in a competitive capital market.

To take growth to the next level and rise above the competition, insurers will likely have to do more than merely wait for a rising premium tide to lift all boats. Many will consider testing new product lines, exploring additional target markets, and expanding their distribution channels to reach a wider base of prospects.

One opportunity stems from the fact that states are not necessarily rebounding equally in terms of economic recovery. Indeed, we are seeing “emerging markets” within our own borders.

For example, with domestic-energy production on the rise, those states with substantial deposits of oil, gas and coal to extract through new technologies are experiencing faster growth and seeing lower unemployment rates than in the rest of the United States, making them prime targets for insurance expansion.

At the same time, certain industry sectors of the national economy are growing faster than others—such as healthcare, which could see an insurable exposure boom as the Patient Protection and Affordable Care Act is fully implemented, bringing tens of millions of new patients into the system.

Outside the country, a number of developing markets, such as China and India, are still growing at faster rates than in the U.S. and Europe, while continuing to build a burgeoning middle class of insurance prospects. This development may entice more U.S. carriers to explore entry or expansion in foreign markets with the most upside potential.

But while organic-growth prospects for P&C carriers appear to be improving going into 2013, some may seek to leapfrog the competition or establish themselves in new markets through mergers and acquisitions. Indeed, a confluence of challenges—including excess capital, reduced ability to release reserves, and investor demand for greater returns—point toward a revived insurance M&A environment in 2013.

Major transformational deals in the U.S. are less likely to emerge, as opposed to bolt-on acquisitions of additional distribution channels, business lines, and geographic outlets. Still, a rising stock market, improved pricing conditions, and pent-up demand could prompt P&C insurers looking to broaden their scope to intensify M&A efforts, potentially driving up the volume and value of deals.

At the same time, the industry is likely to see the distribution landscape changing as independent agencies and brokerages remain a hot M&A segment. However, there may be fewer potential targets available in the regional and mid-size space, as many have been gobbled up during the flurry of consolidation activity over the past several years.

Difficulties in agreeing to deal terms may continue to be an impediment in the near-term, although it appears that spreads in valuations have stabilized and are beginning to narrow. While it's tricky to predict where M&A activity will go over the course of the year, it seems the overall environment is ripe for an acceleration of insurer deals.

Therefore, it's time for insurers to rebuild strategic M&A capabilities. Insurers will need to create enriched M&A playbooks, rigorous targeting and screening strategies, as well as readiness studies so they are prepared to act quickly as opportunities arise.

They also need to be capable of effectively integrating acquisitions into their corporate systems and culture once deals are executed, which can often be a bigger challenge than finding or completing a deal in the first place.

The bottom line is that while there may be much going on in the economy that is outside of the industry's control, there are proactive steps insurers can take to better position themselves in a 'two-steps forward, one-step back'-type of economic recovery.

To adapt to this 'new normal,' carriers must evolve not only to leverage new opportunities emerging in the short term, but to set the stage for longer-range gains. We'll explore some of these options in upcoming blogs. Stay tuned!

Special Reports /

P&C Insurers Well-Positioned For Growth Spurt, But Challenges Remain

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