The easing of state regulation and licensing requirements under financial services reform will help efficiency in pricing and new product development. Companies more than ever need to distinguish themselves in the marketplace or they will not earn an adequate return. These challenges differ between commercial and personal lines companies. For example, financial strain will probably have a different effect on personal lines insurers. Generally for the industry, we re seeing pressure on the loss cost components, and that s eating into redundant reserve positions.
Cash flows are still much weaker, and reserve deficiencies are certainly growing.
So going forward, as there is more financial pain, I think there is more pressure to raise rates, and in the commercial lines industry it s usually easier to raise rates than in personal lines. In personal lines we are starting to see signs that severe pricing problems are emerging. But the personal lines group was better reserved at the start of this year, so there is less balance sheet strain. Also, goals of cross-selling are driving the need to advertise and potentially lose money short term in order to control the customer. At the end of the day, the auto industry is setting itself up to need substantial corrective rate action, and as rate requests increase, that will drive regulatory concerns.