The insurance industry in the U.S. and globally is facing long term challenges that include weak economic growth, an extended period of low interest rates and weak investment income, and rising regulatory demands, according to a new study by Conning.

“Insurers in the U.S. and globally face challenges that are unlikely to resolve in the short term,” said Stephan Christiansen, director of research at Conning. “Sluggish economic conditions affect organic growth potential and overall market development.”

Stephan Christiansen

Christiansen explained that a continued low-interest rate environment in the U.S. and elsewhere is depressing investment income substantially, while regulatory change and reporting requirements are forcing increases in infrastructure investment and costs overall.

The study, “U.S. and Global Insurance Industry Outlook: Economic, Capital Markets, and Regulatory Challenges Continue—Nothing to Be Gained by Waiting for Things to Get Better” presents challenges and potential insurer responses for all lines, including property-casualty, life, annuity and health insurance, both in the U.S. and in Europe and Asia.

“What had initially been seen as a period of post-recession malaise has now become our base-case for strategic and operational planning,” said Christiansen. “Insurers who took a ‘wait-and-see’ approach are now challenged to perform in these adverse conditions, as no clear end is in sight.”

Competition is increasing, Christiansen said.

“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,” he added.

However, the Conning study notes that few significant actions have been undertaken to date.

Observations in the report include:

• Allstate took a bold action, according to Conning, in December 2012 when the insurer’s investment strategy shifted to increased emphasis on hard-asset and infrastructure with public and private equities receiving greater allocations.

• Catastrophe losses since 2004 on average are higher than the previous 10 years, coming in at about $24 billion annually. Conning noted that 2011 and 2012 losses to catastrophes were more than 50% higher than the long-term average.

• After losses in the Gulf of Mexico in 2004 and 2005, insurers shifted exposures to the Midwest, only to see tornado losses in 2008 and 2011. Conning expects repricing of property exposures in the Midwest for both primary and reinsurance coverage during 2013.

• Hurricane Sandy also played a role, as did politics, as volatility for property insurers was present as governors and state insurance departments reacted with non-applicability deductible orders following the storm.

• For the property-casualty industry overall, Conning predicts moderate growth in premiums and modest underwriting losses for this year and 2014, provided catastrophe loss is normal.

• Rate firming should also be constrained due to strong surpluses in the industry, according to Conning.