Insurers must get proactive in 2015 when facing regulatory, pricing challenges

Despite strong performance this year, insurers operating in the United States are facing an uncertain environment going into 2015 and will need to be proactive when facing regulatory and capital management challenges, according to a new outlook report from Ernst & Young.

While combined ratios and return on equity have improved to “levels not seen before the financial crisis,” ROEs are “beginning to fall from a combination of of capital accumulation, competitive pricing, weak investment returns and rising loss expense” as of late 2014, EY suggests.

Relatively low catastrophe losses have also put pressure on reinsurance rates, also leading to lower pricing in primary insurance lines, the report notes.

“Companies that can successfully plan and operate in a fast-changing environment will differentiate themselves from those that respond reactively,” David Hollander, principal at Ernst & Young LLP, and EY Global Insurance Advisory leader.

“Investing in technology solutions and focusing on new markets, products and approaches to existing customers will help insurers manage these external challenges.”

In its report, EY makes six main recommendations for insurers to remain competitive and differentiate going into 2015:

1. Respond to increasing competition with strategic cost management and focused pricing. “For the past three years, insurers have been able to maintain stable expense ratios due in large part to premium growth,” EY suggests. “However, if rates ease in 2015, premium growth may not be able to keep up with expense growth.”

2. Engineer an enterprise data excellence strategy. “Data collection and analysis are necessary decision-making tools, particularly as more insurers compete based on their level of data superiority or develop new business models utilizing these technological capabilities.”

3. Improve customer connectivity by expanding distribution and customer service.

4. Retool operations for new and evolving risks. “New risks such as the ‘Internet of things,’ or the networked connectivity of products, and cybercrime offer growth opportunities for insurers,” EY notes.

5. Proactively address multiple regulatory requirements and potential tax considerations.

6. Address investment performance and capital management.