New York — Margin compression and continued pricing erosion will put increasing pressure on the insurance industry to achieve top-line objectives in 2008, according to Ernst & Young's Global Insurance Center.

"Enabling technologies and the ability to effectively access, manipulate and leverage data across the enterprise will be key for the insurance companies that are able to overcome these challenges," says John Varricchio, spokesperson with Ernst & Young. "Improved automation, data integration and business intelligence will allow IT organizations to align with the business strategy to streamline processes, improve analysis and decision making, and improve interaction with agents and customers."

Companies need to make significant changes and seek alternative growth strategies if they are to remain competitive and survive in the challenging and complex business environment that lies ahead. "With pricing becoming increasingly softer, leadership is going to become all the more important in 2008," says Peter Porrino, Ernst & Young's global director of Insurance. "Today's leaders must steer clear of price warfare and, instead, strive to uncover new business opportunities, make their organizations ever-more efficient and maximize their risk management operations."

New York-based Ernst & Young LLC identified six key issues in 2008 that will influence the property/casualty industry:

1. Striving for Growth: In spite of another year of great earnings, insurers will be challenged to sustain growth in 2008. EY expects margin compression to accelerate over the next 12 months. However, stronger balance sheets and an accumulation of capital will enable insurers to increase share buybacks, boost dividends, enter emerging markets and accelerate merger and acquisition activity. With these prevailing conditions, consolidation is more likely.

2. Operational Transformation: The search for growth and profitability is driving companies to focus on better business alignment and expense control. In 2008, insurers will also take a harder look at evaluating outsourcing and offshoring, particularly for back-office functions and customer-facing business processes. In addition, developing a formal strategic cost management program will be a critical facet of operational transformation.

3. Catastrophe Solutions: Impending soft market conditions will test each company's ability to maintain underwriting discipline and achieve reasonable profits. EY believes that insurers should continue to invest in their ability to understand catastrophe risk and improve underwriting performance. This involves an investment in resources, technology and operational procedures. Only those who can find solutions within this fundamental framework will stay the course.

4. Financial Events: Over the last five years, insurers have increased their investments in alternative asset classes, which has led to greater credit risk exposure. Now is the time to take action and focus on building risk infrastructure and creating more transparency commensurate with the nature of these important investments. Organizations that embrace the people, systems and processes to accurately comprehend and manage the risks of these asset classes may gain a competitive advantage.

5. Solvency II (SII): The implementation of SII may pose a sizeable challenge with far reaching implications for insurers. Besides the extensive improvements to systems, processes and data SII calls for, the convergence of accounting, risk and actuarial information may also pressure traditional actuarial practitioners to develop more sophisticated financial and risk management methodologies and more efficient deployment of capital.

6. International Financial Reporting Standards (IFRS): Regardless of the implementation date being delayed, the time for IFRS is now. Companies need to develop a plan that includes steps to assess the i pact of the proposals on their financial statements, educate key employees and constituents, and evaluate the readiness of their organization for implementation.

"With market challenges only intensifying, there is a particularly fertile window of opportunity for companies to deploy capital and differentiate themselves through innovation," says Christopher McShea, principal, Insurance Advisory Services, Ernst & Young LLP. "Challenges abound, and many will require new ways of thinking. Leaders who recog nize the important changes in this industry, from tighter margins to new compliance and regulatory pressures, and devise inventive, cost-effective solutions for reacting to them, will be laying the groundwork for success in years to come."

The life insurance industry also faces pressures, which include actuarial process inefficiencies, increased business complexity, regulatory demands and data volume are leaving little time for crucial analysis, driving a growing trend toward automation, according to a roundtable hosted by The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP, (E&Y) New York.

Agreeing that current daily challenges are already stretching their departments to the limit, roundtable participants also discussed the added complexity being created by new product guarantees and options. Of even greater concern were the new requirements on the horizon, including the move toward fair value and principles-based reporting. Driven by principles-based approaches to reserves and capital in the United States, as well as IFRS and Solvency II in Europe, attendees acknowledged that the shift from deterministic to stochastic methods is underway. Many questioned their ability to succeed in this new environment without overhauling current actuarial systems and processes.

These new pressures have created more openness to change and while the majority of participants still admit to significant reliance on spreadsheets, they are actively examining alternatives. In fact, when asked the development status of their actuarial organization's business intelligence environment, more than half (55%) say they are "implementing" and 36% say they are "planning" such an initiative.

Read about the roundtable at Actuaries Seek Automation.

Source: Ernst & Young LLP

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