AT THE annual convention of the Independent Insurance Agents & Brokers of America, which was held in October in Orlando, Fla., a panel of insurance company chief executive officers presented their views on the likely state of the market in 2005, as well as on various legislative and regulatory issues. Taking part were Ramani Ayer, the Hartford; Bill Berkley, W.R. Berkley Corp.; Mike McGavick, Safeco Insurance Co., Greg Murphy, Selective Insurance Co.; and Ron Pressman, GE Insurance Solutions. Moderating the panel was IIABA's own CEO, Robert Rusbuldt. Following is an edited transcript of some of their comments.

Robert Rusbuldt: Are we going to have a soft market in 2005, or will there be some sanity in the marketplace?

Mike McGavick: We clearly have a market in transition, one searching for its identity. I think the real question becomes whether the market will match price to risk, or whether it will be afflicted by amnesia. As we look at 2005, we're fairly optimistic that this market will be sensible about pricing.

Ramani Ayer: We experienced a fairly sizable loss in Florida. On the first three hurricanes-we have not reported Jeanne yet-our loss was about $180 million after tax, which is roughly $250 million before taxes. We believe that the hurricanes were a $22 billion-plus event for the market. I'd attribute about 70% of that to personal lines and 30% to commercial lines. My view is that markets have to digest this. I'm optimistic that the impact on the personal-lines market will result in continued discipline and restraint. I also believe the hurricanes will have a moderating influence on the commercial property insurance and reinsurance markets.

Robert Rusbuldt: Ron, GE Insurance Solutions deals in long-tail liability lines. What do you see happening to pricing in those lines in 2005?

Ron Pressman: I think we're going to continue to see consistency. We are having a major problem keeping up with loss-cost inflation in this industry, particularly in the medium to long-tail casualty lines, where loss-cost inflation is increasing at a double-digit rate. It's a major issue for us in the reinsurance markets and in the casualty lines, where we have a fairly significant position as well. So I think consistency in underwriting is going to lead to-I hope slowly but surely-a narrowing of the gap caused by loss-cost inflation. There's no doubt that the industry underwrote very softly in the late 1990s, and we've got to reestablish some sanity in the medium-to long-tail lines.

Robert Rusbuldt: Bill, are companies going to shoot themselves in the foot with pricing in 2005, or will we have stability and sanity?

Bill Berkeley: Ramani and The Hartford think that the storm losses are going to be $22 billion to $22.5 billion. Our people think it will probably be $30 billion. One thing to keep in mind is that it will be another 18 months before we know who's right. In the meantime, we will have to make business decisions without knowing all the facts, which should make insurers cautious. Another thing worth remembering is that right after periods of rapid price increases in the 1970s and 1980s, prices dropped off a little then flattened out for several years. I don't think the world is irrational. Here and there, irrationality sticks its head up, but I think by and large there is responsibility.

Robert Rusbuldt: Greg, what are you hearing from your independent insurance agents in regard to the outlook for 2005? Are there rumblings about wild fluctuations in prices, like 30% increases last year and 20% reductions this year?

Greg Murphy: We're getting a very mixed message in the 20 states in which we operate. The message we're giving to our agents is that if we sell on price, we'll lose on price. We're trying to get our agents to focus on service. If you're just selling on a 60-day renewal cycle, asking customers when their comp renews and looking for a way to lower the price, I don't think that's the kind of service customers really want. When an agent helps a customer with claim handling or loss control, or provides other services, it increases the customer's “switching cost” and makes it much more difficult to move a piece of business from the agent. The process starts with asking customers open-ended questions: What's your biggest business problem? What keeps you up at night?

Robert Rusbuldt: Is there going to be a tightening in the reinsurance market because of the hurricanes, or will they amount to just a blip on the radar screen?

Ron Pressman: Our first focus is on the people of Florida. This has been a devastating event for them. We are in business to help people recover from these kinds of tragedies, and that's what we primarily have been focused on. In regard to the financial impact, we experienced a net loss of a little over $500 million. That's a big number, and it has to be factored into how we underwrite our business in the future. There was no doubt that some of the shorter-tail lines in our industry were softening in the past 12 to 18 months. I hope the hurricanes, if nothing else, were a wake-up call to the industry that, yes, these events occur.

Bill Berkley: Personally, I think catastrophe reinsurers have made unconscionable returns, in the order of 25% to 35% after tax-and most of them are in Bermuda, so they don't bother to pay us any tax. So in some ways, we thank Florida for imposing a tax on these guys. For all of us who pay taxes, it's their turn. They've been through a very profitable period in which there was low storm activity. I would not expect to see any dramatic impact on catastrophe reinsurance prices, but I agree with Ron that the decline on prices will at least be slowed.

Ron Pressman: I might just add a quick comment, about the “unconscionable returns.”

Bill Berkley: I said “catastrophe reinsurers.” I didn't say across the board.

Robert Rusbuldt: Ten seconds for rebuttal.

Ron Pressman: I think we should all recognize the need for appropriate returns for the volatility of the risk assumed. The returns probably have been 20%-plus. But that's inherent in the volatility of the catastrophe reinsurance product. In a line in which you can have a $500 million hit in one year, you need to get a reasonably high return; whereas in the casualty line, which is much more stable, you can afford to have a lower return.

Mike McGavick: I think that's an important point. Sometimes regulators seem offended when companies make a profit in homeowners insurance. We'd better be advocates for the idea that in good years we're going to have to make a significant profit to make up for those years when we're struck by the kinds of horrors we've had in Florida.

Robert Rusbuldt: TRIA is incredibly important to insurance companies. What are the ramifications for the industry if TRIA is not renewed before Jan. 1?

Mike McGavick: It is of utmost urgency that Congress pass a TRIA extension. The failure to extend TRIA is already costing companies money, since they have to prepare the policies that agents will be selling after Jan. 1, adding some kind of exclusion for terrorism that would be triggered if TRIA is not extended. We're going to have to get TRIA extended-the sooner the better, to prevent dislocation in the sectors that rely on this coverage.

Robert Rusbuldt: Ramani, I want to ask you about asbestos litigation reform. You've been sort of a leader in the industry in dealing with that issue on Capitol Hill.

Ramani Ayer: Major industrial companies are using the bankruptcy process to accelerate policy limits, and to cause a split between insurers and our insureds. That's a major problem for insurers. Asbestos litigation reform is vital. Without it, most of the large commercial insurance companies will be paying these losses for the next 20 to 30 years. Meanwhile, of the claimants receiving awards, 90% are not impaired. So what we are trying to do is achieve reform not only on Capitol Hill but also at the state level. There's been great reform in Ohio. We're now working in Texas, as we hope to across the country.

Robert Rusbuldt: Ron, what's the No. 1 legislative problem?

Ron Pressman: TRIA ranks right up there, as does asbestos litigation reform-or, for that matter, the whole area of class-action and tort reform. Today, 2% of the country's gross domestic product goes to tort costs. This really is a tax on the economy.

Robert Rusbuldt: One of the major issues for independent insurance agents and, frankly, for our company partners is attracting good talent. How do we solve this problem?

Mike McGavick: We need to put our best face forward. This is an industry that has two important characteristics that I think can make it attractive to young people. First, we do something very noble. In the wake of events like the Florida hurricanes and 9/11, the extraordinary value of our products has never been better demonstrated. We have to be more bullish about promoting the nobility of what we do, because people want to be part of something that's important. We do a lousy job, frankly, of communicating that central importance to society.

Second, we have to make sure people understand our new environment. Compared with some other industries, we may have been slow to modernize. But today we are clearly on the cutting edge when it comes to using technology for harnessing big ideas, for making our products more relevant and less costly, and for enabling us to better serve the public. As a result, this is becoming a sexier industry to young people than it has been for many years. I think young people will be attracted to our sense of purpose and to the fact that we are becoming a really innovative industry.

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