“How insurers manage change amid this crisis in 2009 is likely to determine their long-term viability and success,” said Paul Veronneau, PricewaterhouseCoopers US insurance industry advisory services leader. “The current ways of doing business are under tremendous stress, and only companies that are able to adapt to the new world are likely to survive.”
PricewaterhouseCoopers has identified the top nine issues and trends affecting the insurance industry in 2009:
1. It’s Back to Basics: After years of increasingly complex and market-sensitive products, it is back to basics for insurers hammered by poor returns and questionable credit quality. The focus is on ensuring solvency by exiting marginally profitable products, stricter underwriting guidelines and the use of reinsurance to reduce risk profiles. They also are concentrating on such basics as service: Solid claims processing has emerged as a genuine competitive differentiator, and 90 percent of insurers PricewaterhouseCoopers has met with are considering automating and streamlining their claims process.
2. Investment Management Effectiveness: With today’s capital markets generating investment losses and impairment write-downs, insurers are reviewing their risk appetite, investment strategies and internal compliance policies. With tighter margins, insurance companies are looking to control their investment costs and rationalize their products to better reflect market risk.
3. Maintain Adequate Capital and Surplus and Manage Liquidity: Struggling insurers have been hard-pressed to maintain adequate capital and surplus, and some may need painful capital infusions to remain solvent. They also must manage liquidity risks that could leave them short of cash: For example, rating downgrades are triggering “Armageddon clauses” that force insurers to unexpectedly make collateral postings. “Trigger analyses” and capital contingency plans are a new staple of business.
4. Cost Reduction: With lower premiums, higher losses and tightened margins, insurers will be looking to cut costs, and opportunities abound for intelligent, sustainable cost control strategies. However, managers must avoid cuts that impair business operations, such as marketing cuts leading to lower sales or staff cuts resulting in poor service. They also must ensure they retain the capacity to grow in the eventual economic recovery.
5. Changes in Sales and Distribution: Historically, insurers have weathered tough economic conditions better than other financial institutions. However, sales of life and variable annuity products have been dropping, and personal lines auto and home carriers are in a softer underwriting cycle. Insurers are responding by reinventing life and annuities products around retirement and asset preservation and focusing on good business practices such as maintaining producer and customer relationships and supporting agent productivity and profitability.
6. Privacy and Information Protection: A deluge of new state and federal privacy and data security requirements is placing new demands on insurers and resulting in duplicative compliance initiatives. Insurers need to avoid redundancy by taking a holistic, integrated approach to privacy, and find ways to translate compliance spending into operational efficiencies and strategic improvements.
7. International Financial Reporting Standards (IFRS): US adoption of IFRS will bring significant changes to insurance accounting and financial reporting, with impacts on earnings and balance sheets. Prescient insurers are already preparing for a transition that will take effect for some companies as soon as 2012. Although the conversion will be demanding, insurers can use it to make a fresh start and discard outdated processes and procedures.
8. Regulatory Reform: In the wake of market turmoil, new regulation is increasingly likely, especially monitoring of financial performance and capacity. Insurers which receive TARP funds may be subject to executive pay limits and other federal mandates. Game-changing proposals such as an optional federal insurance charter for the life and property & casualty industries are also now on the table, and insurers could be affected by broader financial reforms that address holding company solvency and liquidity. The fragmented nature of insurance regulation means that individual state regulators will remain a wild card.
9. Economic and Tax Policy: With the presidency and both houses of Congress solidly in Democratic hands for only the second time since the 1970s, insurers must carefully monitor developments in economic and tax policy, especially as pressure grows for revenue increases in the face of ballooning budget deficits. Two key areas to watch: Business tax increases that could offset desirable corporate tax reductions, and new limitations on insurers’ ability to defer US tax on foreign earnings.
“These issues have begun and will continue to shape the insurance market in 2009 and beyond,” said Veronneau. “The bright side is that companies are now being forced to strengthen their balance sheets, improve risk management and introduce operational efficiencies, and that will position the survivors to thrive in the long term.”
A full copy of the PricewaterhouseCoopers report, Top Nine Insurance Industry Issues in 2009: Crisis and Change, is available online at www.pwc.com/insurance.