2009 has challenges ahead

Insurance consultants Watson Wyatt have predicted a tough year for the insurance industry with expensive products needing redesigning.

Philip Brook, global head of insurance consulting said: "2009 is going to be a challenging year for the insurance industry. Many companies will face falling demand from retail customers due to the recession coupled with concerns over the future performance of stock markets. Some product designs will look expensive due to the increased costs of guarantees resulting from low interest rates and continued high levels of volatility. Insurers' balance sheets have also been significantly weakened. For most companies we can expect less expansionist activity while management looks inward and takes action to repair some of the damage. However, 2009 might turn out to be a very good year for those insurers with relatively strong balance sheets and access to capital who are able to take advantage of current market conditions and acquire distressed companies at low prices."

In separate statements the company said:

• M&A activity may increase as companies begin to line up as either buyers or sellers
• companies with capital to spend could expand into new territories, products and markets
• 2009 will see increased attention being paid to the strength of risk governance arrangements, and greater scrutiny of risk models
• capital constraints on banks and a widespread aversion to counterparty risk will necessitate the development of innovative solutions and require close attention to understanding the residual risks
• Regulators will make fresh assessments of the risk management capabilities of local and international insurers and their ability to meet rising capital infusion requirements of insurance operations
• The economic crisis has turned a spotlight on the need for a more robust reporting and regulatory system. We are likely to see modifications to the proposed changes based on the lessons learned, while at the same time the emphasis on adoption and implementation of new methodologies is likely to increase
• 2009 will be a critical year for European regulatory reform. 2008 closes with disagreement between the various representatives of the Member States over key elements of the Solvency II initiative and we believe that these issues must be resolved quickly. We see a strong, flexible and risk-sensitive regulatory regime as essential to the efficient functioning of the insurance markets and believe that such a regime can provide a firm foundation for the more proactive insurers to add considerable value to their businesses through better risk management
• The personal lines market will have to deal with the increasing prominence of aggregator websites and their move into other markets and other lines away from their initial rise in UK motor and household
• Companies face an uncertain claims environment with the negative impact of increased claims from the recession and the financial market turbulence possibly being offset by price deflation
• The fall-out of the credit crunch – including its impact on some prominent insurers – has stalled and in some cases reversed the soft market in commercial lines pricing. We see a growing need for companies in this market to develop more sophisticated pricing techniques.