After enduring stress with respect to pricing pressure and reduced insured exposure through mid-2009, the overall health of the U.S. insurance industry has improved to a great extent in 2010. Though the market turmoil forced many companies to take immense write-downs, the worst of the crisis appears to be now behind us.The soft market conditions, along with legislative changes, remain the chief causes for concern for the overall industry at this point. The industry continues to be challenged by the regulatory uncertainties and massive health care restructuring. Though there are signs of economic recovery, its sluggish pace is expected to continue at least through the remainder of 2010. Also, structural economies of scale have pushed the industry toward consolidation. While enormous financial support from the government helped rescue American International Group ( AIG) from collapse, many other firms remain under tremendous pressure or have fallen by the wayside. Competition within the segments of the industry has reduced, which is consolidating through mergers and acquisitions. This has increased market shares of the largest firms. We expect static growth with persistent soft market conditions, resulting in further consolidation in the industry. However, we expect the overall condition to improve in 2011, should the economy turn to growth post-recovery.
The newly passed historic healthcare legislation prevents private insurance companies from using the pre-existing condition clause, but at the same time brings in more than 30 million additional people under coverage. While the legislative overhaul brings more regulatory scrutiny into this space, the net negative effect is far more muted than was initially feared. Also, the removal of this uncertainty is a net positive in its own right. However, the healthcare reform legislation will mar the overall profitability of the health insurance industry in the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of covering more than 30 million additional people.
With the signs of recovery in the capital market (though still weak by any means), the concerns related to reinsurers' ability to access the capital markets on reasonable terms have sufficiently eased. However, diminishing new business and rising expense ratios are major concerns for reinsurers at this point. The higher rate of unemployment is primarily responsible for the lower business production. Also, due to increased levels of price competition among insurers, market premium volumes continue to shrink. We expect slightly lower favorable reserve development trends in the upcoming quarters, as there are lingering concerns about the overall economy.