Ernst & Young IAAS Releases 2006 Insurance Industry Insights; Identifies Key Life and P/C Issues for the Executive Radar Screen.

NEW YORK -- The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP today released its '06 Industry Outlook addressing key life and property/casualty sector issues including economic capital, catastrophe modeling and risk recalibration, and M&A activity.

Economic Capital Gaining Momentum... A Call to Action

While there is no standard economic capital methodology yet in the U.S., it is becoming increasingly clear that the industry is moving in this direction. European regulations are establishing more common standards and are driving global insurers towards economic capital.

The business case for economic capital and underlying currents are growing stronger in the U.S. and companies who do not begin taking economic capital seriously in 2006 will pay the price in years to come. With competitive regulatory and rating agency developments in the U.S. including S&P's new enterprise risk management criteria, the handwriting is on the wall and companies must take action.

"It is no longer a question of if, but when U.S. companies will be expected to have economic capital measurement capabilities... those who wait for U.S. standards to be set will wake up one day to find themselves behind the competition," explains Michael Hughes, Principal with Ernst & Young's IAAS practice. "U.S. companies should begin planning and piloting economic capital so they are prepared for the new market reality which is getting closer and closer."

Recent Storms Causing P/C Risk Recalibration

For the P/C industry, 2005 will be remembered as the year doubt was cast upon catastrophe models. However, the true fallout will occur in 2006 when the industry will be forced to determine next steps. It will be a crucial period as P/C insurers decide if they will continue to retain and manage catastrophe risk or if they will turn to capital markets which could create a significant chain reaction.

History can offer valuable lessons as P/C insurers make their next move. In 1985/1986 commercial writers, driven by anemic results, withdrew liability capacity from the market. Unfortunately, this move trigged an unwanted market response as numerous companies chose to self insure rather than pay rising premiums.

"In an effort to eliminate high-end liability, insurers lost attractive business," explains Chris McShea, National Director for the Property Casualty division of Ernst & Young's IAAS practice. "If the industry is not thoughtful in its response to recent catastrophe issues, it could set off a series of events leading to premium leaving the market. Now is the time to carefully weigh the options and examine the risk/reward of potential next steps."

M&A Activity... Mid to Small Scale

Although 2006 may not be a stellar year for mega-deal M&A activity, consolidation will continue to be a part of the industry landscape. Less activity is expected on the P/C side, but some interesting deals are already taking shape in the life sector.

While the P/C sector has sustained considerable hurricane related losses, there are few insurers and reinsurers that will be forced to sell. Anticipated rate increases have resonated with the capital markets, leaving many companies, particularly start ups, well capitalized.

On the life side, we except to see a few mid to large-sized transactions however, the real M&A action will take place around small and mid-sized deals strategically targeting closed blocks, distribution channels or specific product lines. In addition to traditional M&A activity, we expect to see much more capital market activity through securitizations.

"While we don't expect 2006 to be a standout year for M&A activity, consolidation will continue to be a part of the industry landscape," explains Rich DeHaan, Senior Actuarial Advisor, of Ernst & Young's IAAS practice.

About Ernst & Young IAAS

The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young includes 150 professional staff with more than 90 credentialed actuaries throughout the United States and Canada. IAAS delivers actionable business advice to its clients in the life/health and property/casualty insurance industries. It also provides insurance, risk management and claims advisory services to a range of businesses and corporations. IAAS employs financial modeling and other quantitative analysis techniques and technologies to assist clients in making decisions that will improve performance and achieve competitive advantage.

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