Rapid technology changes, demanding customers, tight regulations, catastrophes, capital buildup, low interest rates, slow economic growth—not exactly the horsemen of the Apocalypse, but these factors will determine the fate of insurance in the New Year, says Ernst & Young.

"These forces have not had as great an impact in 2013," says EY in a report covering its U.S. P&C industry outlook. "Nevertheless, these issues remain volatile and their impact should not be underestimated in 2014."

Stronger internal operating fundamentals, including pricing and underwriting discipline, will protect the industry from being rocked by external pressures. Here are six tips for insurers to defend against the shifting tides of risk:

Double down on broad-based, transformative technology with high ROI impact

A recent EY survey showed that more than half of insurers intend to integrate digital strategies into their corporate structure, and more than three-quarters will do this within the next three years.

In a low interest rate environment, insurers must invest in operating technology to drive down frictional costs and stay current. Interactive and flexible mobile design opens up direct claims channels and agent-powered distribution, says EY, and customers and agents are demanding it. Although companies are aware of the need to evolve digitally, though, 40% of insurers say they need senior management support to make the change.

Adopt a range of enterprise data excellence

Strong data monitoring is a must for insurers seeking to stay ahead of market forces and federal oversight, says EY, and those who follow the following tips will "outperform competitors in 2014 and beyond":

Establish enterprise-wide common standards and policies for capturing, storing and reporting data.
Utilize analytics with applications that monitor systems with minimal intervention and create reports for faster response to emerging claims issues.
Optimize risk and capital analysis across a company's value chain, including distribution, underwriting, business processes, claims and investment applications.
Organize data ownership and controls under a chief data officer.
Enhance data security to protect from cyber attacks within and without the country.

Innovate product development processes and delivery

The risks of tomorrow are driven by customer expectations, disruptive technology and legal frameworks. The risks EY expects insurers to quickly design, develop and market new products targeted for the following exposures:

Cyber insurance.
Catastrophe insurance, especially surrounding floods and terrorism coverage.
Workers' compensation in the new healthcare market.
Nanotechnology.
Sensor technology in telematics, consumer and industrial products.

Exploit segment differences for targeted growth strategies

Companies exploiting global, geographic, product and demographic opportunities in the following sectors will achieve the best growth and bottom-line performance in coming years, says EY:

Specialty market pricing has firmed and transformed with new entrants and products. Success requires pricing discipline, experience and analytical capabilities.
In workers' compensation, lost-time loss frequency is trending down, medical costs are contained and premium growth is accelerating. However, trends vary significantly state-by-state.
Regional differences mean uneven economic performance throughout the country. Population and employment drivers, industry-specific economic trend, and political environments also produce varying risks and opportunities.
Alternative capital structures are reshaping the primary and reinsurance markets.
Merger and acquisition activity offers the opportunity to immediately increase market share in existing business segments and scale new markets.

Get in front of emerging investment challenges

Investment income performance fell by 14% from 2008 to 2012, says EY, with record-low yields expected in 2013 and continuing into 2014. Even an upswing in yields that emerged in May 2013 will contend against maturing investments from the past turning up with low rates. Insurers are exploring new sources of capital from equities, commodities and hedge funds. On top of that, leadership changes at the Federal Reserve, tapering economic policy and a slowly recovering global economy is fueling uncertainty in investment markets. Insurer board of directors, executives and risk committees should practice financial stress tests, scenario planning and economic global modeling for whatever the increasingly interdependent world ushers into 2014.

Prepare for escalating governance and accountability

Insurers have always faced a complex regulatory environment, says EY, but insurers must be careful not to get tangled up in certain regulatory trends in 2014. These include solvency-focused regulations such as ORSA affecting internal risk management practices, keeping financial resources in line with Federal Insurance Office (FIO) rules, and cross-border supervision and regulation of multinational corporations.

Special Reports /

6 Forces That Will Shape the Insurance Industry in 2014

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