For P&C insurers, premium volume rose in 2013, catastrophe losses were comparatively modest, and the industry's capital position is at record levels, according to “2014 Property and Casualty Insurance Industry Outlook - Transforming for growth - Innovation leading the way,” from Deloitte.
However, the consulting firm said even as the U.S. economy continues to recover, insurers must innovate as they continue to adapt to evolving consumer demands, incorporate new data sources and operate in an uncertain regulatory environment.
“Whatever the challenge, this outlook indicates that simply maintaining the status quo is likely no longer a sound business strategy no matter which operating model is employed by a particular insurer, given the macro- and microeconomic trends buffeting the industry from all sides,” said Gary Shaw, U.S. insurance leader for Deloitte.
“Catastrophe losses have been relatively modest, helping produce an industry-wide underwriting profit of $2.3 billion and a positive combined ratio of 97.9 for the first half of 2013, a big improvement from the net underwriting loss of $6.3 billion and a combined ratio of 101.9 a year earlier,” Deloitte said. “And the industry also has plenty of capital on hand, with aggregated policyholders’ surplus at an all-time record high.”
Net written premium for the industry was 4.5 percent in 2013, Deloitte said, compared to 3.7 percent in 2012; net income after taxes increased 42 percent, to $24.5 billion from $17.3 billion in 2012. The industry’s combined ratio dropped to 97.9 percent in 2013, compared to 101.9 percent the year prior; and net underwriting swung to a $2.3 billion gain in 2013 from a $6.4 billion loss in 2012, Deloitte reported.
While external factors have encouraged and supported the industry, insurers should be concentrating on taking transformational steps to gain competitive advantage, Deloitte said, including new product launches, reconsideration of distribution models, considering merger and acquisition activity, increasing recruiting efforts for data scientists and analysts and core-systems and business transformations.
“Transformation is required because insurers need to keep pace with changes being implemented not only by traditional competitors, but also new players from outside the industry,” Shaw said. Hedge funds, for example, have changed the industry by pouring capital into the reinsurance market, and rather than limiting themselves to providing software and support to the insurance industry, technology firms increasingly are entering the direct insurance distribution market.
Demand from individual investors, pension funds and other institutions has driven the growth of catastrophe bonds, as well, Deloitte said, which has created more competition in the reinsurance industry.
“Consolidation might be one solution to drain excess capacity from the market,” Deloitte said, “perhaps overcoming a number of headwinds that have been a drag on insurer M&A activity over the past couple of years.”
The distribution landscape also is changing, Deloitte observed, as more insurers are offering products direct to consumers and the more private exchanges now are offering health insurance for sale. A raft of new products also is beginning to alter the landscape, including insurance telematics products, cyber liability and environmental liability products. Business insurance buyers also are increasingly amenable to purchasing coverage over the Internet, Deloitte said.
The evolution of distribution methods and insurance products has led insurers to upgrade and underwriting, pricing and customer service technologies, Deloitte said, and also to place increased emphasis on the predictive analytics.
P&C insurers face considerable regulatory uncertainty, Deloitte said, and carriers should expect state insurance regulators to increase their focus on market conduct, in light of the industry’s exemption from the federal Consumer Financial Protection Bureau’s purview.
“Carriers are also looking to prepare for new financial information demands from regulators, likely to be generated by the National Association of Insurance Commissioners’ (NAIC) Own Risk and Solvency Assessment initiative, the European Union’s Solvency II directive, and other such calls for data and analysis,” Deloitte said. “Finance will likely play a major role in scenario planning, stress testing, and other efforts to comply with new oversight requirements.”
Adapting legacy systems to accommodate evolving demands for data could be an issue for insurers and drive the need for transformation efforts. According to Deloitte, 57 percent ranked “finance systems inhibiting access to data” as a top-three barrier; even when finance business partners have the correct and necessary data, they often expend significant time and effort rationalizing it to make it relevant for strategic business purposes, Deloitte said.
“Without sacrificing their stewardship role, finance leaders should develop a plan to align with higher value enterprise activities so they may become more valuable business partners with their internal clients,” Deloitte said. “To evolve in this direction effectively, partnering competencies should be built or imported into finance — an area where recruitment and development efforts have traditionally focused more on acquiring or developing technical proficiency rather than a broader business skill set.”
The lack of available skilled talent presents a particular challenge for the industry, Deloitte said.
“Despite relatively high unemployment, there is a shortage of qualified workers steeped in specialized skills insurers crave, including advanced analytics, predictive modeling, mobile technology, and other abilities in high demand, leaving the industry to cope with a talent paradox — having millions unemployed, but few ready, willing and able to step in and help insurers transform their operations,” said Andy Liakopoulos, a principal in the human capital practice at Deloitte.
Data proliferation offers a wealth of opportunities, but has presented a challenge as insurers upgrade their data management capabilities in underwriting, pricing and claims, Deloitte said.
“As more and more carriers look to execute strategies to drive performance and reduce risk via leveraging data and analytics, insurers should be prepared to make the tradeoffs needed to develop capabilities that they believe will provide them with strategic advantages,” said Neal Baumann, Deloitte Consulting LLP’s global insurance sector leader. “In some cases this might lead to the need to revisit and modify traditional business and operating models.”
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