2014 Could Be A Game-Changing Year for Insurers

Positive micro-factors are in play as well. Valuations are on the upswing, while momentum from stock buybacks may be losing steam, perhaps prompting more carriers to seek a deal. Reinsurance seems particularly ripe for consolidation, with capital pouring into the property-catastrophe market from individual and institutional investors.

From the buyer's perspective, primary carriers are likely to focus on M&As building scale or capabilities. Mid-size and regional companies might turn out to be the most active in the M&A market, as they look for opportunities to enlarge their footprint and take their game to the next level.

Additional consolidation in the agent/broker community is expected as well, as intermediaries move to increase their market access and leverage.

• The distribution landscape is morphing into an increasingly diverse mosaic.

Insurers are looking for new, more cost-effective ways to reach consumers, particularly in underserved markets. A key consideration is how carriers might make the overall pie bigger, rather than keep battling over slices of the existing insurance marketplace.

One manifestation of this trend is the anticipated expansion of direct-to-consumer sales of small-commercial insurance, which could not only disrupt the agency distribution system, but draw a significant number of currently uninsured businesses into the market as well. A Deloitte survey found that about one-in-five small-businesses would be very likely to buy from carriers over the Web, while another third would be somewhat likely to take the plunge.

There is also growing awareness of environmental liabilities, prompting increased attention to insurance covering "green" construction and manufacturing, which could spur new product development and additional premium volume for mainstream and specialty insurers alike.

Another climate-change-related opportunity could emerge as a reform law passed last year requires the National Flood Insurance Program to explore the possibility of increasing private carrier participation in this troubled, but potentially huge property insurance market. Some private carriers are already entering the market on their own initiative, and others may soon follow if conditions are right.

• Regulatory uncertainty leaves many insurers in a holding pattern.

Although the Federal Insurance Office (FIO) finally came out with its long overdue report last month on how regulation of the industry can be modernized and improved, most of its recommendations require Congressional action (unlikely in the current political environment) or involves a call for states to take action (which for now the FIO cannot compel). Still, the FIO's reform proposals introduce yet another element of uncertainty into an already shifting regulatory landscape.

Meanwhile, what to do in response to the looming expiration of the Terrorism Risk Insurance Program could dominate insurance-related headlines throughout the year, unless Congress overcomes its current gridlock and agrees to renew the enabling law in time to spare buyers from having to go bare on the exposure or pay a much higher premium for coverage. However, should TRIP expire or be significantly scaled back, insurers should be prepared for a potential regulatory backlash if the industry moves in force to limit or abandon the coverage, or to effectively price consumers out of the market.

• Transformations and the 'talent paradox.'

More carriers will be launching transformations in underwriting, claims, finance and other core functions, realizing that incremental improvements in efficiency may not deliver enough value in a slow-growth market. However, insurers are also coming to appreciate that to truly transform their operations they might have to upgrade not just their software or processes, but their people power as well.

One obstacle standing in their way is the 'talent paradox,' meaning that despite persistently high unemployment many carriers are having trouble finding, attracting, and retaining those with specialized skills in high demand, such as in advanced analytics or predictive modeling.

To overcome this challenge, insurers may have to broaden recruitment strategies and target candidates not just from outside the company, but beyond the industry as well — for example, hiring out-of-work teachers with math skills who can be retrained for a career as an actuary or in analytics. They may also look to create a more flexible career lattice that rewards lateral as well as vertical moves within the company where key skills sets are more urgently needed.

• Carriers look to differentiate themselves with tech enhancements.

More economical information-gathering options may soon propel auto insurance telematics to the level of an industry disruptor, with the playing field being leveled for smaller and regional competitors by external data aggregators.

In addition, mobile technology will likely play an increasingly important part in marketing, sales, and service delivery across the industry, as carriers look to move beyond transaction-based applications to become more relevant in the everyday lives of their clients.

Through it all, as carriers expand the types and volume of data they collect for underwriting and claims, cyber-security will loom ever larger as an operational and reputational risk.

Additional opportunities and threats are cited in Deloitte's property-casualty outlook report.

The bottom line, however, is that insurers will likely need to be more innovative and flexible in their thinking and business models if they expect to be market leaders in an increasingly competitive, more tightly segmented, and ultimately customer-driven environment.