FOR PEOPLE working in a business that seems chronicallydown-in-the-mouth, analysts sounded almost giddy last month as theyreviewed the property-casualty industry's recent performance andspeculated about its prospects in 2004. Take, for instance, thiscomment from Robert P. Hartwig, Ph.D., CPCU, senior vice presidentand chief economist for the Insurance Information Institute.“Insurers could experience a rare 'Goldilocks' market in 2004-abrief period of time when everything is just right.”

Hartwig's comment came in the III's annual “early bird”forecast, which is a compilation of the views of Wall Street stockanalysts and insurance industry observers. This year's participantsincluded Standard & Poor's, A.G. Edwards, Tillinghast-TowersPerrin and Conning & Co.

In regard to net written premium growth, the analysts' 2004projections averaged out to 8.1%, which while down from 14.6% and10.8% in 2002 and 2003 respectively, is not bad compared with theaverage 3.4% growth from 1990 through 2000. The analysts alsoexpect the industry's return on equity to climb into double digitsfor the first time since 1997, thanks to an anticipated improvementin the investment environment and continued solid underwriting. Allthis, in an averaging of the analysts' predictions, should lead toa 2004 combined ratio that will be a point lower than 2003'sestimated 101.7, and down sharply from the 115.7 combined ratiorecorded in the year of 9/11.

As the industry comes out of what he called a “perfect storm”that had battered it for five years, Hartwig cited some of theconditions that could lead to a golden year ahead: “Pricing will beneither too high nor too low, and business and consumer demand forinsurance will generally be met with relatively few areas of acuteshortage. Interest rates will rise but not too quickly, lest bondprices fall too much. For the icing on the cake, the expandingeconomy ensures that exposure growth will accelerate-meaning thatinsurers will…have some opportunity to compete for new business,rather than resort to destructive price wars with each other forthe same old business.”

There was other good news last month too. Conning ↦ Co.released a study in which it found that insurers' efforts to lowerreserve deficiencies are finally bearing fruit. “In many ways, 2002appeared to mark a turning point in reserve adequacy,” said MichaelWeinstein, director of research at Conning Research &Consulting. “The addition of $17 billion in total reserves and theindustry's refocus on underwriting, loss control and claimsmanagement…have reduced the prior-year estimated deficiency.Accident years 1997-2001 still appear to be deficient, but accidentyear 2002 carried reserves may be adequate.”

In a report it issued last month, A.M. Best noted that theindustry's premium growth and underwriting performance are downfrom their 2002 pace, but that insurers still continued to postgains during the first three quarters of 2003. The report alsocontained this note: “A.M. Best believes that barring any severecatastrophe or another significant decline in the equity marketsduring the fourth quarter, the industry will generate favorableoperating results and add to surplus for the first time in threeyears.”

But, of course, this is the insurance business; and manyanalysts, included some previously cited, have noted a fewobstacles that could keep the Goldilocks scenario from coming topass. For instance, there are The Three Bears.

Take Papa Bear. He seems a reasonable bruin at home, but at hisday job in the asbestos litigation industry, he's a much morefearsome animal. So far he's devoured more than 70 companies thatwere connected in some way to the asbestos business and lately hasbeen gazing hungrily in the direction of some insurance companies.To keep Papa Bear at bay, these carriers have added billions totheir loss reserves and have turned to Congress for help.Bear-proofing legislation didn't make it into law in 2003, butCongress will try again in 2004. If they succeed, insurers willbreathe a little easier. If not, Papa Bear could remain aproblem.

Then there's Mama Bear, who works for the Association of TrialLawyers of America and suffers from an obsessive-compulsivedisorder; that is, she litigates more or less continuously. The NewYork Times recently tried to downplay the problem. Whileacknowledging that Mama Bear filed five times as many lawsuits lastyear in federal court as she did in 1962, the Times pointed outthat the percentage of cases that Mama took all the way to trialfell to 1.8% from 11.5% over the same period. But, of course, youdon't have to get in front of a jury to force a defendant to rackup a sizable bill in defense and settlement costs. Last month,Tillinghast-Towers Perrin released a report noting that the cost ofthe U.S. tort system hit $233 billion in 2002, a $27.4 billion bumpfrom 2001. (Excluding medical malpractice, the insurance industry'spart of the tab came to $165.8 billion.) And the future is notlooking any brighter: “Tillinghast estimates annual (tort cost)increases will be in the 6% to 11% range for the next severalyears.” At that rate, according to the report, they could hit$1,000 per citizen by 2005, up from the current figure of $807.

Last but not least, there's Baby Bear. He seems to be awell-behaved child right now, but you never know how kids will turnout. In 2004, maybe Baby Bear will grow up to be Winnie the Pooh,and we'll have a year as sweet as honey. Or maybe he will morphinto Ursa horribilis, spawning an Andrew-like hurricane or evenHomeland Security Secretary Tom Ridge's worst nightmare. Theinsurance industry does its best with catastrophe modeling topredict how Baby Bear will develop, but the task seems to becomemore difficult with each passing year.

The moral of the story? Like Goldilocks, the insurance industryin 2004 may need a little luck to slip into the bears' denundetected, eat its fill of porridge and get out unscathed.