Sluggish economic conditions, regulatory complexity major challenges for 2013

Low interest yields in the U.S., proposed changes to capital requirements in Europe and insurance-linked securities will all affect the property and casualty insurance market this year, suggests a report from Conning Inc.

Hartford, Conn.-based Conning predicts insurance firms in the U.S. face “sluggish” economic conditions, declining investment income and increasing regulatory complexity.

“Companies that succeed in this environment will seek performance in targeted strategies in particular geographic or market segments and will invest internally in technology for effective cost management and new market distribution approaches,” Conning reported in the executive summary of its U.S. and Global Industry Outlook, released Thursday.

Examples of technologies include mobile technologies, telematics, predictive modelling and data analytics, a Conning spokesperson wrote in an e-mail to Canadian Underwriter.

Specialists in the market “have broadly outperformed generalists,” the spokesperson added.

“Our studies of outperforming companies show many have higher expense ratios while investing in technology and analytics to improve underwriting effectiveness and achieve superior loss ratio performance.”

In addition to American insurance firms, Conning’s report also discusses carriers in Europe, where regulators are proposing the Solvency II capital requirements and risk management standards for insurers.

“The further development and implementation of European and national regulations hold the potential to affect everything from capital and risk management to distribution and product design,” according to the report. “Solvency II will continue to command a significant amount of resources and attention in 2013.”

In the U.S., Conning notes, insurers will continue to face low investment returns.

“The low interest rate environment is seen as extending further into the future, putting pressure on a strategy of holding course until interest rates recover to normal levels,” Conning reported.

“Investment income is a major source of income support and capital generation in all sectors. Companies need to find alternatives in extending risk for added yield, or find alternative solutions to fill this income gap.”

Reinsurers, Conning adds, faces “strategic challenges” with insurance-linked securities.

“These alternative capital sources are limiting pricing power of the reinsurance industry and are accelerating the convergence of reinsurance and capital markets.”

The full report can be purchased from Conning’s website.