Insurance Industry 2012: More Crystal Ball Gazing

Ernst & Young expects a continuing negative trend for the property and casualty insurance industry while A.M. Best predicts a more stable outlook for the health insurance sector.
Ernst & Young's new Property and Casualty Insurance Industry Outlook predicts continuing economic uncertainty and instability that will, more likely than not, prolong the negative performance trend in the property and casualty insurance industry.[1]

Insurers must anticipate, understand and address the impact of new regulations.
In order to improve their performance, Ernst & Young advises that property and casualty insurers must "anticipate, understand and address the impact of prospective... new regulations and accounting changes prior to implementation." Insurers must "employ flexible strategic responses in terms of capital and resources" in order to best position themselves in the current market conditions, according to David Hollander, Global Insurance Advisory Leader for Ernst & Young.[2]
They should consider enhancing the sophistication, articulation and deployment of their risk management standards and related systems, as compared to their current regulatory and reporting environments. Insurers that fail to appreciate the impact of regulations and new accounting standards could find that a potentially higher cost of capital may derail their competitive strength.[3]
In contrast, however, A.M. Best Co. has revised its outlook for the health insurance sector from negative to stable for 2012.[4]

Last year's negative outlook was concerned with new regulatory requirements.
Last year, "A.M. Best affirmed its negative outlook on the health insurance sector, mainly due to concerns over the industry's ability to implement and manage the various requirements of the Patient Protection and Affordable Care Act (PPACA), as well as the potential for margin compression."[5]

Yet, A.M. Best is forecasting a stable outlook for the health insurance sector in 2012, citing factors such as:
  • The margin compression that was expected did not materialize, and results were favorable for most health insurers through 2011;
  • The health insurance industry effectively implemented the 2011 requirements of PPACA, including minimum medical loss ratios and rate review requirements; and
  • A "trend of broad-based moderation in utilization" that has generally kept operating earnings favorable.[6]

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