Articles - Insurers may face troubles bolstering top and bottom lines

 Ongoing global economic challenges will make it difficult for insurers to generate growth and profits over the short- and long-term, according to a new report from Deloitte assessing the insurance industry's prospects for the new year. However, by focusing on strategic growth opportunities, operational excellence and innovation, insurers may still achieve their goals, according to Deloitte's "2012 Global Insurance Outlook: Generating growth in a challenging economy takes operational excellence and innovation," released earlier today.

 "Global economic doldrums, low interest rates, persistently high unemployment and a sluggish housing recovery have created challenges for insurers," said Rebecca Amoroso, vice chairman, Deloitte LLP and insurance sector leader. "Yet even in such uncertain economic times, there are opportunities to generate profitable growth by attracting new customers and growing market share through product development, distribution and marketing reevaluation, and reinventing the customer experience. At the same time, insurers must keep transforming their operations to improve margins and drive more profit to the bottom line by adopting new technologies and management strategies to squeeze unnecessary costs out of the system, as well as employ their people and capital more productively."

 Sam Freidman, Deloitte's insurance research leader, adds, "While achieving growth, operational excellence and innovation in such a difficult economic and competitive environment might be easier said than done, opportunities are available for insurers that can seize the moment. There are many options insurers might consider to grow even in the toughest of economies if they can overcome the obstacles they face."

 Trends, obstacles and challenges insurers will face in 2012, according to Deloitte's report, include:

 Market Outlook

 Property and casualty insurer top lines will benefit from rising prices prompted in part by high 2011 catastrophe losses and subsequent hikes in reinsurance premiums. In personal lines, auto and homeowners carriers have both consistently seen higher, loss-driven rates while the soft market in commercial lines appears to have bottomed out with carriers and brokers reporting significant premium increases on renewals.

 While variable annuity sales are growing, products with structured guarantees may continue to struggle in the low interest rate environment. Whole life insurance sales are on the rise, but there are fundamental, longer-term challenges confronting life carriers as they try to reverse declining penetration rates, and modernize and streamline marketing, sales and distribution.

 Overall, there are opportunities for annuity growth as more consumers seek retirement income options. Life insurance carriers have a large uninsured and underinsured population to target.

 Generating Growth

 Target emerging markets: With developed economies failing to deliver consistent, large-scale growth, insurers may consider entering emerging markets including China, India and Brazil, where the financial security demands of an expanding middle class could provide significant growth opportunities. Insurance penetration rates in 2010 reveal the ratio of non-life insurance premiums to gross domestic product (GDP) is just 1.5 percent for Brazil, 1.3 percent for China and 0.70 percent for India. By comparison, the penetration rate is 4.5 percent for the United States, 4.1 percent for Canada and 3.1 to 3.7 percent for major European countries, according to Insurance Information Institute.

 Mergers and acquisitions: Mergers and acquisitions volume increased in 2011. However, deals tended to be strategic, niche acquisitions with buyers adding new product lines and distribution channels, and expanding geographic reach into emerging markets. With more carriers undergoing strategic reviews for potential mergers and acquisitions, there is potential for an uptick in bigger deals in 2012, particularly if organic growth remains challenging over the short-to-medium-term.

 Operational Excellence

 Regulatory change: Policyholder protection takes on increased importance for the new Federal Insurance Office as it reports to Congress by Jan. 31, 2012 about insurance regulation and potential federal oversight protection for consumers. Solvency concerns and efforts to address them have slowed, while certain insurers may face increased regulatory burdens if designated as a nationally or globally Systemically Important Financial Institution.

 Enterprise risk management: Many insurers are integrating enterprise risk management into their standard operating procedure while spreading ownership of risk throughout the strategic decision-making process. There is also an increased emphasis on governance, infrastructure and disclosure over quantitative modeling. Considering "Black Swan" events and tax risks is also a priority.

 Spurring Innovation

 New products: Emerging property and casualty exposures are prompting coverage for cyber-liability, green construction, nanotechnology, global political risk, and professional liability associated with new regulations. New personal line products offer private unemployment insurance, as well as protect homeowners whose home values decline below their mortgage. More life and annuity hybrid products are emerging to meet multiple needs, such as incorporating a long-term care benefit into a life or annuity product or combining term and universal life policy attributes.

 Predictive analytics: Social media appears ripe for analytic scrutiny. Many insurers have a presence in social media communities, but they have yet to evaluate the impact of their efforts and benchmark their work against competitors. Analytics can also be used to gather cross-selling insights about buyer needs, providing an advanced form of customer relationship management throughout the customer's life cycle.

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