The more things change, the more they stay the same. And the insurance industry is no exception to the rule. Property and casualty results reached their zenith in 2006, and the market now is soft. Whether this soft market will end in the usual manner -- with underwriting losses, reductions in capacity, and carriers shrugging their shoulders and saying, "That's the underwriting cycle" -- will be determined by the carriers' actions in 2008.
The industry will continue to be driven by the Three R's: risk, revenue and regulation. The manner in which carriers respond to each of these three drivers in 2008 will determine their fates in 2009 and beyond.
Regulatory Rhetoric Drives Risk Response
In the European Union, the Solvency II directive finally has some teeth, and savvy insurers already are preparing to meet the 2012 deadline for compliance. This regulation actually may provide some benefits for compliance. At a minimum, an enterprise risk platform will be needed to fulfill the requirements of Pillar 1.
Many of the world's larger insurers have been deploying enterprise risk strategies over the past few years and are seeing the benefits. Even European carriers that opt to rely on the standard risk model rather than developing their own models will see the benefit of more efficient capital allocation. This action will strengthen the European insurance market, which already is highly concentrated in the largest players. The rest of the world must take notice or be dominated by carriers from the EU. The focus on enterprise risk strategies by rating bureaus such as Standard & Poor's will force carriers outside the EU to develop more effective risk strategies, and this will benefit the industry as a whole.
In the United States, rhetoric surrounding the 2008 elections will influence health insurers more than other sectors. Only half of the 10 insurance commissioners whose terms expire in 2008 are elected; the rest are appointed. None of these seats are located in the coastal Southeastern or fire- and earthquake-prone Western states. Politicians will focus their comments on health insurance, rallying voters around the need for more-affordable health insurance rather than crying out for more affordable healthcare. Healthcare payers can expect to be in the crosshairs through 2008, with uncertainty about their futures beyond the presidential election.
The annuity sector has seen recent court decisions on annuity suitability that will lead to changes in business practices. In addition, the National Association of Insurance Commissioners (NAIC) has proposed model legislation to formalize regulations governing how carriers and producers match products to clients as well as requirements for monitoring producer behavior. The model law holds insurers and brokers accountable for ensuring that investors are sold appropriate annuity products. Many companies are preparing for compliance with the model law by implementing business intelligence systems that enable them to monitor producer and client behavior.