Margin compression and pricing erosion to continue to put pressure on industry analysts say

Insurance companies will continue to face a tough business environment in 2008, according to Ernst & Young’s Global Insurance Centre.

Analysts predict margin compression and continued pricing erosion will continue to put pressure on the insurance industry and companies will need to seek alternative growth strategies if they are to remain competitive in the challenging business environment ahead.

Ernst & Young said the six key issues it expected to influence the global insurance industry in 2008 were: striving for growth, operational transformation, catastrophe solutions, financial events, Solvency II and international financial reporting standards.

Andy Baldwin, head of insurance at Ernst & Young, said: “Securing profitable distribution is becoming the battleground within the UK general insurance industry, especially in commercial lines.

“We do not see a slowdown in distribution consolidation in commercial lines, or the emergence of new sales channels in personal lines, especially those which are web-enabled.”

Baldwin added that insurers were being left with significant operational expense overhang and out-of-date business models.

“They are increasingly paying for work transfer through their commission line – but the expense line has not moved enough to reflect this shift. We expect the cost management focus in many insurers to continue into 2008,” he said.

Baldwin said he also expected to see insurers starting to force consolidators and national brokers to drive down costs in their own businesses and look at managing relationships with clients to drive revenue growth.

“This will be rather than the current structural profit redistribution from insurer to distributor that we are seeing in the industry,” said Baldwin.

Managing money effectively and using it in high return areas will also be key.