PwC Report Predicts Competitive Realignment of Global Insurance Sector

As a "watershed" for the insurance sector, the international financial crisis is pointing the way toward a deep competitive realignment of the global insurance industry, according to consultants PricewaterhouseCoopers.

"This shake-up will challenge the competitive relevance of some insurers," PricewaterhouseCoopers said in a report. "However, it also offers agile and far-sighted firms a once-in-a-generation opportunity to catapult themselves to the front of what will be a very different racing order within many geographical markets and classes of business."

The report described an unfolding environment of changing expectations of the insurance sector from governments, regulators, customers and investors.

"We've tried to cast some light on the future of the insurance industry, not tomorrow, but the day after," Achim Bauer, a partner at PwC in London, said.

"The developments we see today are only the beginning," PwC said in a statement accompanying the report. "The environment will continue to evolve at a rapid pace over the next two to three years, ruling out any return to the relative stability and certainty that preceded the crisis."

In PwC's view, the international insurance industry will be marked by such factors as organic restructuring, increasing uncertainty over taxation, pressure on reinsurance sales in developed markets, and a growth in both regulation government assertiveness toward the industry.

"The market and economic environment in which insurers operate is subject to considerable uncertainty," PwC said. "Success will depend on close monitoring of developments and the ability to move quickly to capitalize on opportunities as the situation becomes clearer."

Bauer said the insurance industry has not received the same attention that has been focused on the banking sector during the economic crisis. But insurers faced similar problems to the banks, he argued. These have included a squeeze on assets and reductions in yields and asset quality.

"You see significant impacts on the premium levels" in reinsurance, life and nonlife, he said, adding that capital has become harder to obtain.

The organic restructuring, PwC said, will be influenced by exits from some markets and reductions in some lines. The result, the report suggested, will be openings for insurers that are left and a "significant reconfiguration in the list of leading players."

The tax environment, PwC said, will be clouded by attempts to strengthen government finances and to contain offshore arrangements. The choice of corporate domiciles will become more important, the report said. Insurers also will face tougher financial reporting demands as they compete for capital, according to PwC.

The insurance industry, PWC said, is also likely to be affected by such trends as closer scrutiny of remuneration, higher expectations by retail customers of the life sector, and a revival of mergers and acquisitions activity.

As government regulation becomes more attentive, the report said, it also "will be more subject to national priorities in their interpretation and application." The role of governments in relation to the industry, PwC added, will be boosted by such factors as bailouts, changes in regulation and actions taking regarding health care and pensions.

PricewaterhouseCoopers said an expected increased appetite for reinsurance in emerging markets "is unlikely to offset the decline in reinsurance buying in developed markets and may force many reinsurers to rethink how they sustain profitability and growth."

The winners in the coming environment will be those companies that will be able to understand the long-term competitive implications of the current economic downturn, PwC said.

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)