FOR PEOPLE working in a business that seems chronically down-in-the-mouth, analysts sounded almost giddy last month as they reviewed the property-casualty industry's recent performance and speculated about its prospects in 2004. Take, for instance, this comment from Robert P. Hartwig, Ph.D., CPCU, senior vice president and chief economist for the Insurance Information Institute. “Insurers could experience a rare 'Goldilocks' market in 2004-a brief 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 stock analysts and insurance industry observers. This year's participants included Standard & Poor's, A.G. Edwards, Tillinghast-Towers Perrin and Conning & Co.

In regard to net written premium growth, the analysts' 2004 projections averaged out to 8.1%, which while down from 14.6% and 10.8% in 2002 and 2003 respectively, is not bad compared with the average 3.4% growth from 1990 through 2000. The analysts also expect the industry's return on equity to climb into double digits for the first time since 1997, thanks to an anticipated improvement in the investment environment and continued solid underwriting. All this, in an averaging of the analysts' predictions, should lead to a 2004 combined ratio that will be a point lower than 2003's estimated 101.7, and down sharply from the 115.7 combined ratio recorded 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 the conditions that could lead to a golden year ahead: “Pricing will be neither too high nor too low, and business and consumer demand for insurance will generally be met with relatively few areas of acute shortage. Interest rates will rise but not too quickly, lest bond prices fall too much. For the icing on the cake, the expanding economy ensures that exposure growth will accelerate-meaning that insurers will…have some opportunity to compete for new business, rather than resort to destructive price wars with each other for the same old business.”

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

In a report it issued last month, A.M. Best noted that the industry's premium growth and underwriting performance are down from their 2002 pace, but that insurers still continued to post gains during the first three quarters of 2003. The report also contained this note: “A.M. Best believes that barring any severe catastrophe or another significant decline in the equity markets during the fourth quarter, the industry will generate favorable operating results and add to surplus for the first time in three years.”

But, of course, this is the insurance business; and many analysts, included some previously cited, have noted a few obstacles that could keep the Goldilocks scenario from coming to pass. For instance, there are The Three Bears.

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

Then there's Mama Bear, who works for the Association of Trial Lawyers of America and suffers from an obsessive-compulsive disorder; that is, she litigates more or less continuously. The New York Times recently tried to downplay the problem. While acknowledging that Mama Bear filed five times as many lawsuits last year in federal court as she did in 1962, the Times pointed out that the percentage of cases that Mama took all the way to trial fell to 1.8% from 11.5% over the same period. But, of course, you don't have to get in front of a jury to force a defendant to rack up a sizable bill in defense and settlement costs. Last month, Tillinghast-Towers Perrin released a report noting that the cost of the U.S. tort system hit $233 billion in 2002, a $27.4 billion bump from 2001. (Excluding medical malpractice, the insurance industry's part of the tab came to $165.8 billion.) And the future is not looking any brighter: “Tillinghast estimates annual (tort cost) increases will be in the 6% to 11% range for the next several years.” 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 a well-behaved child right now, but you never know how kids will turn out. 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 morph into Ursa horribilis, spawning an Andrew-like hurricane or even Homeland Security Secretary Tom Ridge's worst nightmare. The insurance industry does its best with catastrophe modeling to predict how Baby Bear will develop, but the task seems to become more difficult with each passing year.

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

Special Reports /

What's Going On: Root for Goldilocks--but keep an eye on those bears

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