Insurers will have to keep coping with a changing market in 1998. There are a few safe harbors, such as auto insurance and financial services. But for the most part, the industry will be marked by increased competition, lower margins, and continuing consolidation.

Property-casualty insurers will see lackluster growth. Analysts at A.M. Best Co. estimate that pretax operating income will drop to $26.3 billion in 1998 from a particularly high $35.5 billion in 1997, when the industry enjoyed low claims and a strong stock market. Premiums, which rose 3.6% in 1997, should see a gain of 3.5% this year, according to the Insurance Information Institute's survey of industry analysts.

The homeowners' side of the business has also been weak, and insurers are likely to continue putting limits on homeowners' policies. Auto insurance has done better, led by Progressive Insurance Groups, but even the growth in car premiums will decelerate in 1998.

Insurers will have a lot of new opportunities, though, as product demand shifts. In life insurance, for instance, "buyers are less worried about dying and more concerned about outliving their assets," says Jeffrey L. Sawyer, national director for insurance consulting at Deloitte & Touche.

HIDEBOUND? That means a growing demand for financial management services. The challenge for traditional insurers, however, is that mutual funds and banks also offer financial management services and tend to be more flexible about creating new products than are slow-changing insurers. Chief executives of life insurance companies polled by consultants Tillinghast-Towers Perrin think that changing customer demand is one of the top strategic issues they face, but fewer than 40% feel well-prepared to address it.

Restructuring to appeal to more sophisticated consumers will not be an easy task for tradition-bound insurers. "Managements are getting the message that performance is going to be challenging and the way we did business years ago won't cut it in the future," acknowledges Lon A. Smith, CEO of Hartford Life Insurance Co., previously a part of ITT Hartford Group Inc.

To prepare, insurers are streamlining, but John T. Sinnott, a vice-chairman at J&H Marsh & McLennan Inc., warns that "there's still a lot of surplus." And while the number of mergers and acquisitions has slowed after a few years of frenetic activity, the average size of deals has increased--and will continue to grow, according to a report by Donaldson, Lufkin & Jenrette Inc.

To cope with increasing competition, insurers have several options, says Deloitte & Touche's Sawyer. The survivors will have to become more global, move into new business lines, or develop strong niche markets. But to date, few U.S. players have been able to do any of those. Watch for more turbulence.

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