With investment income seemingly enfeebled to for the near time, property/casualty insurers will have to put a renewed emphasis on organic growth and underwriting, a new report from Dallas-based management consulting firm Robert E. Nolan Co. contends.

The report, titled "Operational Priorities for Property and Casualty Executives," underscores the urgency of this endeavor, noting that in light of the financial crisis, insurers’ return on equity has dropped by a over 80% compared to prior years and their policyholder surplus has dropped measurably.

What’s more, the financial crisis has also slowed mergers or acquisitions as a means of growth. While, in the search for diversification and economies of scale, the largest carriers may still be on the hunt for acquisition targets, this may not be a viable strategy for most insurers. Thus, the report counsels insurers to focus on organic growth where possible by improving existing products, focusing on differentiation in the marketplace and improving customer service.

“With the financial turmoil of 2008 continuing into 2009, the profits of earlier years are unlikely to continue, putting increasing pressure on pricing in order to retain market share,” the report states, noting that recent underwriting results for the industry have been less than stellar, with combined ratios ranging from 104 to 107 for personal and commercial lines.

Yet, Nolan makes clear that reestablishing underwriting discipline will come at a cost. Insurers need to employ complex models that differentiate rates at behavioral and demographic levels to properly price risk. Developing such predictive models requires investing in the ability to collect and analyze data from various sources across the enterprise.

Much as carriers need to focus on pricing discipline, they will also need to exhibit probity on the expense side, targeting internal investments in order to ensure the appropriate allocation of resources. With IT budgets constrained, this entails both leverage existing technology and making only well-justified purchase decisions, the report states.

"Technological investments are required to develop and constantly modify the predictive models, which will become the industry norm as increased integration of internal and vendor supplied information becomes the source of rate plan competitive differentiations," the report states. "Carriers with outdated core systems need to plan now for a comprehensive redesign of underwriting processes and technology, incorporating expanded use of the Internet for distribution channels and customers."

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