Low investment income is putting pressure on insurers to cut costs more aggressively, according to a report by PricewaterhouseCoopers (PWC).

The report – Top issues, The Insurance Industry in 2012 – from the US arm of the firm says companies need to reduce expenses to maintain margins but given they have been cutting costs for some time “it is uncertain how much more in earnings they can squeeze from this stone”.

PWC says although more mergers and acquisitions were expected in 2011, the number of deals was on par with 2010, with insurers looking for ways to deploy excess capital but unable to find willing sellers.

Although there is considerable activity around deals, the transactions fail to come off because buyers and sellers disagree on future profitability and the impact of tax and regulatory change on valuations.

Insurers wanting to expand are attracted to developing economies, but PWC says they have to weigh up the benefits against the complexities of doing business in the new markets.

“These include inflationary concerns, prohibitive or uncertain market-entry costs, and frequent regulatory changes, such as the allowed percentage of foreign ownership or market share.”

PWC finds insurers becoming more adept at using technology to capture data on customers, for instance by pulling together information from web logs and comments on websites, and using newer forms of communication such as mobile and interactive devices.

It says while property and casualty insurers have always focused on loss control and risk management, personal and life insurers are becoming more active in using data and smart analytics to cut losses and improve risk management before a claim occurs.

PWC says insurers will be able to use real-time data from sensors and devices to assess the risk of individual customers based on actual behaviour, reducing the need to compete on price. 

Insurers are also using technology to present customers with solutions to needs rather than a standard product.