In the insurance world, it almost goes without saying. Despiteall our actuarial and analytical skills, things never quite go theway we might expect or would like to see. The forces of natureintervene. So does human conduct and social styles. One way oranother, surprises crop up.

For surprises, we have insurance. And if there is a universalinsurance, personal lines–in the form of automobile and homeownerscoverages–is it. What adult American does not have one or both?

Because of the volumes of policies involved, there is perhaps atendency to “lump everything together.” Yes, the waves of personallines cycles are huge, but this is still a dynamic area of theinsurance industry, one with its own breed of twists and turns.Just when we think we have it covered, something new comes on thescene–an unprecedented run of storms, a “new” kind of naturaldisaster (like a mudslide), or nuisance disaster (like mold). Orthere may be a new set of regulatory issues, or a run of lawsuitsbased on changing patterns of residence.

In our look ahead for personal lines, there will be plenty ofchallenges that will test our industry and each of us as aprofessional. There is also some reassuring and welcome news.

Many of the forces now at play in standard lines demonstrate arational, smooth-running marketplace.

Insurable unit growth is strong in both automobile andhomeowners. We have had strong vehicle sales of 16 millionunits-plus for the last three years. In 2004, we witnessed recordhome sales of 6.7 million, along with record housing starts.

Higher volumes have been accompanied by single-digit auto rateincreases on the order of 3 percent to 5 percent each year. We alsoproject a 2.5 percent homeowner rate increase for the end of 2005,the lowest increase in six years. The rate trend is understandableagainst the backdrop of the 1990s, when homeowners lost money nineout of 10 years, followed by rate increases from 2000 to 2004.

Of course, we still are impacted by the weather and localenvironments. For example, windstorm areas are still experiencinglarge rate increases–as much as 50 percent in coastal NorthCarolina last year prior to third-quarter hurricanes. We all knowthe horrendous hurricane experience of the last two years. Still,whether it is the Carolinas, California or Florida, Americanscontinue to flock to coastal areas, tempting nature while erectingincreasingly expensive properties.

The most recent storm tragedy in the Gulf states illustratesanother critical coverage need–flood insurance. The severe floodingin New Orleans in the aftermath of Hurricane Katrina is a call forwidespread purchase of flood coverage. The federal flood programprovides up to $250,000 primary coverage (depending upon the floodplain), and there are specialty markets for excess flood coveragefor higher amounts.

Homeowners located in flood plains need to purchase floodcoverage to prevent the financial disaster of losing theirhomes.

Other loss trends have included a rise in mold exposure, withCalifornia ranking in second place behind mold-claims leaderTexas.

While homeowners premium rate growth may be modest, traditionalloss exposures are decreasing, often dramatically. In 2004, we hadthe lowest arson rate in recorded history. Increased use ofsecurity systems has reduced the rate of theft claims. And a newerhousing inventory results in fewer maintenance-related claims, suchas for electrical or water damage, more common in older homes. Inall, this means less rebuilds, reducing loss experience related tothe cost of construction materials and labor.

The average value of homes, their size and cost, and theaggregate value of contents and furnishings, continues to rise.Mainstream two-income families living in half-million-dollar homeswith all the amenities are not a rarity. Our industry becomes thebeneficiary, in the form of the adjustments, often automatic, inthe insured valuation for homeowners policies, for structure aswell as contents. These increases are averaging 3-to-10 percenteach year.

At the same time, we must be alert to the homeowners socialenvironment. Two-income families, birthing trends, divorce andremarriage, elders being cared for at home, wealthier individuals(on paper at least) have brought about more employment of nanniesand day-care workers, as well as more distant relatives “watchingsomeone.”

Combined with a litigation-prone citizenry, we are seeingsignificant increases in employment practices liability insuranceclaims on homeowners liability.

Agents must have a good feel for their insureds' familysituations and any lifestyle issues. This may involve more personalquestions than in the past, but if presented and handledprofessionally, we will stay out of trouble and so will ourclients.

Similar forces apply in auto insurance. We have had strongvehicle sales, 16 million-plus, for the last three years. And,while vehicles are more expensive to repair than ever before, thisis offset by the greater percentages of late model and moreexpensive vehicles on the road, with their accompanying higherinsurance valuation.

This vehicle population is also better built and safer than inthe past. While rate increases should be modest for the next fewyears, all these factors tend to “normalize” auto and amelioraterisk, not that the liability side of exposure isn't something theindustry as a whole will closely watch.

Basing qualification and rates on the insured's credit score orcredit history is shaping up as the real battleground in thepersonal lines arena–for both auto and homeowners lines. There are26 states examining the use of credit in auto and homeownersinsurance underwriting. Arkansas has banned credit scoring inwriting auto coverages, and Texas is studying whether the practicediscriminates against poor and minority drivers.

Expect this issue to remain contentious, as our industry willcontinue to insist on the proper role of creditworthiness inoverall risk assessment and insurability. We have already seen thisin high-value homeowners, where we are using the loss mitigationtools of both a credit history and CLUE (Comprehensive LossUnderwriting Exchange), or similar reports of the insured's lossexperience.

In the past, property location, in addition to such givens asvaluation and construction specifics, was the major determinant ofrates. Now, we are almost underwriting the insured as opposed tounderwriting the property.

In some cases, this will drive agents to seek out surplus linescoverages for their insureds, where availability becomes theprimary issue over cost of coverage. It will be interesting to seehow this controversy settles out. One compromise, or adjustment, onthe horizon: scoring systems that make allowance for medicalemergencies, recent divorce, a parent moving to a nursing home orother similar issues that impact otherwise creditworthyindividuals.

Agents should also consider the business-expanding possibilitiesin specialty lines.

Industrywide, some trends are nothing to write home about. Therehas been a decline in insurable units for the mobile home segment,sales of recreational vehicles and watercraft are flat, andpersonal umbrella sales growth has been modest.

Still, there is a group of high-asset homeowners whose lifestyleincludes expensive recreational pursuits. Agents should pursue, asrisk managers, the full coverage needs of this group of homeowners,including personal umbrellas.

Overall, personal lines will experience steady growth in volumein the foreseeable months ahead, accompanied by modest growth inpremium rates. While exercising caution with respect to distinctrisks (coastal areas, mold, EPLI), many aspects of the Americanquality of life–including newer, better built and higher-valuehomes and cars–speak well for the future profitability of personallines coverages.

There are excellent opportunities for aggressive agents who knowtheir insureds and communities well, and who eagerly embrace theirrole as comprehensive risk management specialists.

There is much to gain in keeping things personal.