Ernst & Young Issues 2007 US Industry Outlook for Property/Casualty Insurance Industry

New York, 11 December 2006 - In 2007 two themes will prevail in the property/casualty insurance industry: the need for better capital management and a drive for innovation, according to Ernst & Young’s Global Insurance Center. In 2006 we saw the convergence of favorable factors and the prospect of strong profitability, barring unforeseen events. The industry has exhibited strong resiliency in 2006 with advances in the form of stronger balance sheets, better controls, improvements in risk management and continued advances in pricing techniques.

"The past four years have been marked by unrelenting regulatory scrutiny, unparalleled catastrophic losses and an incredibly vibrant hard market," said Pete Porrino, Global Director of Insurance, Ernst & Young Global Insurance Center. "Together these factors have created an unusual window of opportunity, attracting new competitors to the market that have a different view of risk and desire to innovate. "

Five key issues will shape 2007 for the property/casualty insurance market:

1. Maintaining and managing profitability: Profitability can be managed by looking at three key areas: the difference between premium and loss trends, cost control and capital management. Forward-thinking companies are aggressively managing quality and profitability across product lines, deploying capital judiciously and tackling rising costs.

2. Shifting from growth to innovation: A declining market is emerging and creating an opportunity for the innovative deployment of capital and market differentiation. The Bermuda sector foreshadows the innovation trend with new market entrants establishing non-traditional organizations, launching competitive new products and pursuing underserved market segments. Opportunities remain for incumbents in the areas of underwriting, catastrophe exposure management, capital management, and expense management.

3. Lingering post-2005 and 2006 catastrophe market issues: Policyholders in coastal communities are still struggling with claim disputes, limited availability of products and daunting price increases. In the midst of uncertainty and regulatory intervention, companies will need to manage the "risks" of recovery.

4. Changes in the reinsurance market: Reinsurance will be a particularly innovative market in 2007 that will push the limits on the use of advanced analytics at the transaction level as well as in the capital allocation process. The profitability of the 2006 property cat book will be a particular object of interest. Hedge funds, having entered the market, will make it more dynamic.

5. Risk and Control convergence: In an increasingly complex regulatory and reporting environment driven, in part, by Sarbanes Oxley and the impending Solvency II framework, leading insurers are moving toward a convergence of risk management activities to better achieve well-controlled and transparent management of risk and capital on a cost effective basis.

"We are likely to see a more complex and difficult business environment in 2007," said Porrino. "The winners will be those companies that can execute on their business strategy, manage their capital judiciously and be innovative during a period of anticipated stagnant or declining profitability."

About Ernst & Young’s Global Insurance Center

The Center is the hub of the Ernst & Young network of professionals dedicated to serving the global insurance market and connects our people around the globe, sharing information and experience on current and emerging industry issues. The goal is to help our global insurance clients address their complex issues by drawing on our broad range of services including: assurance, tax, actuarial & risk management, regulation & compliance, internal audit, finance and performance management, transaction advisory services, and technology advisory to support these services.

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