Earlier this year, local television news stations in my arearepeatedly aired stories about a string of violent crimes in a parknot far from my home. The stories about Flushing Meadows-CoronaPark--probably better known as the site of the 1964 World'sFair--were broadcast with one particularly troubling image of a manwho had been beaten beyond recognition.

As newscasters urged viewers to help identify him, they fueledlocal citizens' anxieties with news that there were 21 serious parkcrimes in the fourth quarter of 2006.

Countering these figures, the New York Police Department issueda statement, explaining that two men believed to be responsible for11 crimes were arrested within a month. "Without them, park crimewould have declined from the 16 in the previous (third) quarter to10 in the fourth quarter," the NYPD statement said.

Continuing in this vein, of course, the NYPD could just aseasily have pointed out that without a dozen criminals, park crimewould have been nonexistent in the quarter.

This type of numerical slight of hand used to be all the rage inthe property-casualty insurance industry. We all remember thetypical phrases--"If not for adverse reserve development, recordhurricane losses and a bad investment, we would have reported aprofit."

Criminal No. 1--adverse development--is the one that captivatedour attention for years with his ability to beat companies to abloody pulp armed with asbestos liabilities, construction defectissues, excess workers' compensation claims and the like.

His alter ego--favorable development--has emerged more recently,as we note in the data analysis contained in this issue (see page13). With his more benevolent spirit, he may not get all the presshe deserves.

At a typical industry gathering early this year, for example, anindustry spokesperson tried to convince investment analysts thatlast year's record earnings were sustainable. He pointed to thefact that insurers were managing their capital, suggesting thiswould stave off reckless soft pricing, and added that there wasplenty of earnings' steam in unrealized investment gains.

But beyond a brief bit of lip service to healthy balance sheets,he never directly mentioned the possibility that there was some fatin carried loss reserves.

Sporadically, public companies started announcing fourth-quarterfinancial results at about the same time, and it soon became clearthat some insurers were already finding redundancies in their lossreserve positions available to release into earnings.

Without performing rigorous actuarial analysis, it's notpossible to know how much cushion exists for the industry, or howfar insurers are from tapping them out.

Given the magnitude of profits from other factors--a lack ofcatastrophe losses being one of them--and given the amount ofdisclosure surrounding loss reserve estimates now being required ofpublic companies, however, it should be safe to assume that realchanges in development patterns prompted the initial takedowns, andnot attempts to manipulate earnings.

While we hope prudent loss reserving practices continue,increases in the frequency of favorable development disclosures andexpert opinions on overall reserve adequacy bear watching asharbingers of the next hard market.

No insurance executive will tip us off with a phrase like, "Ifnot for favorable development, our reported 102 combined ratiowould have been 105."

But history teaches that when premiums lag inflationary losstrends, underwriting profits fade. And without reserve cushions tohide the bad news, signals for needed price hikes will become cleareven before the next mega-loss event.