Insurers Need To Focus On Core Operations, Underwriting

   Of DOW JONES NEWSWIRES
  (This report was originally published Thursday.)

NEW YORK -- Insurers need to focus on their core businesses and do better underwriting so that their profitability can improve, according to a report.

In a new study examining the top issues facing insurers, Deloitte & Touche, an accounting firm, said the expected cost savings from economies of scale and gains from cross-selling have failed to materialize in the insurance industry in recent years.

Also, margins are being squeezed at insurers and many in the financial-services industry as investment income has declined due to the weak economy, according to the report. Geopolitical uncertainty only exacerbates the situation.

"There's a fundamental shift back to trying to excel at the few products you're good at," said Owen Ryan, global managing partner for Deloitte & Touche's insurance practice. "I think companies have given up on being all things to all people - clearly for the short term. I hope they've given up on that idea for the moderate- to long-term."

Insurers also are feeling pressure because they have historically underperformed banks when you look at return on capital, Ryan said. That has to change, he said. The industry must make an underwriting profit, instead of depending on investment income to generate profits, he said.

Insurers as a whole haven't posted an underwriting profit in the past eight years, according to the report. The industry had an underwriting loss of $53 billion in 2001 and a loss of $18 billion in the first ten months of 2002.

At the same time, insurers are having to reevaluate how they invest their capital, in part due to the narrowing of spreads as interest rates have declined, Ryan said. That includes looking at fixed-income vehicles that are risker but have wider spreads, he said.

"The issue our clients, or the insurance industry, have to be careful about is effectively managing their credit risk," Ryan said. "That is a skill not all insurance companies have. You have to be smart about it."

In its report, Deloitte & Touche noted that a number of insurers have sold or exited businesses where they have not achieved a strong market position in recent years, particularly overseas.

Ryan said there will likely be more sales of blocks of business, rather than blockbuster mergers, in the next few years as insurers focus on core operations. Insurers don't want the hassle or expense of undertaking massive mergers, particularly technology integration between large companies with legacy systems, he said.

"When times are difficult, you don't have time to focus on things that are ancillary to your business or not where you're going to put your best efforts of growth around," Ryan said. "You've got to get focused quickly on managing those businesses where you can make a return. Everything else you put in someone else's hands to try and make a run at it."

-By Chad Bray; Dow Jones Newswires; 201-938-5293; chad.bray@dowjones.com

Updated February 14, 2003 7:30 a.m. EST