NAPSLO Daily caught up with more than a dozen members, askingthem to predict the top stories likely to play out in 2009.

Glancing in a rearview mirror to look back on the events of2008, and gazing into their crystal balls to forecast what's ahead,the consensus was that the top story that will impact theE&S/specialty segment might easily be summed up by a phrasepopular during a past political campaign--"It's the economy,stupid."

Robert Owens, president of RPS of Lexington, a unit of RiskPlacement Services in Kentucky, was the first member to tell NAPSLODaily that the economy is "the number one issue affecting ourindustry for 2009."

"With a slowed economy the demand for insurance has declined,reducing both premium volume and overall exposures," he said,articulating a view that would be repeated many times over inresponses to NAPSLO Daily. Separately, in private meetings betweenbrokers and carriers, they assessed their business plans andconcerns for the year throughout the four-day NAPSLO Mid-YearEducational Workshop in Indian Wells, Calif.

While the downward impact of an economic recession on insurancepurchases weighed heavily on the minds of executives who sharedtheir views with NAPSLO Daily, the turmoil in the financial marketsalso scored high as a potential top story among those worried aboutthe uptick in losses that might develop as a consequence ofboth.

Scott H. Smith, president of S. H. Smith & Co. in Hartford,Conn., who identified the "impact of the financial meltdown on theinsurance industry" as the top story for 2009 "and beyond," said,"We are predicting this monumental event will stagger not only thepredictable lines of insurance, such as E&O and D&O, butalso other major areas."

Explaining the less predictable impacts to lines other thanprofessional liability and directors and officers liabilityinsurance, he noted the potential for foreclosures and arson toimpact the property line, and for inflated awards and crime toimpact general liability insurers.

"The insurance industry needs to reserve for the usual type ofactivity that accompanies recession in the extreme, in addition tothe predictable claim activity for financial setbacks," Mr. Smithsaid.

Taking cues from the political campaign slogan and the statedobjective of the new administration in Washington--to follow ablueprint for change--responses from many longtime NAPSLO membersexpressed hope that a top story in 2009 might be one about achanged insurance market with regard to pricing andcompetition.

While every broker and insurer responding to a direct questionabout whether the market would harden this year answered that itwould, several doubted that the lessons of 2008 or of past softmarkets would be heeded by all.

Some respondents, echoing the promise of real change inWashington from President Obama's administration, predicted federalregulation of the industry in one form or another. Others eyed theeconomic stimulus package, with its planned investments in thenation's infrastructure, as a potential boost to commercialconstruction activity and to the demand for E&S insurance thisyear.

Michael Miller, president of Scottsdale Insurance Company, isn'tthat optimistic. "The stimulus package from Congress will have alag effect as it will take time to roll it out. This would seem toindicate there will be businesses that will continue to struggleand that the number of new companies will be lower," he said.

Mr. Miller and other carrier executives, however, did foreseeone development that could push business back onto the books ofE&S carriers in 2009--a potential retrenchment of standardcarriers from the E&S business precipitated by impaired capitalpositions.

"We are seeing a significant reduction in capital across theindustry and the ability to attract new capital is lacking.[Standard] companies will have to evaluate the risk profile oftheir books of business," he said.

Nathan Warde, president of Aspen Specialty in Atlanta, said,"The capital markets remain very constricted. While they may not beentirely frozen, he believes the inability "to recharge [aninsurer's] capital base following a significant loss event...isforcing some management teams to rethink how they have put theircapital to use."

"Those carriers with significant catastrophe accumulations arealready moving to reduce them. Others are looking at their morevolatile lines of business which could potentially lead to somecarriers shedding books of business deemed either too volatile ornon-core."

"Either trend will push more business into the E&S market,"he said, echoing the sentiments of Christopher Timm, president ofCentury Insurance and executive vice president of Southfield,Mich.-based Meadowbrook Insurance Group, who also predicted areversal of the "soft market-induced expansion" of standard carrierrisk appetites into surplus lines. Mr. Timm noted that thecombination of storm losses and investment write-downs in the lastyear resulted in an overall loss of surplus in the industry.

He said the standard markets entered traditional surplus linesniches in recent years with standard forms, standard underwritingand standard rates. As a result, "the experience on this portion oftheir business cannot be good," he concluded. "Many companyexecutives are seeing a need for rate increases. A simple analysiswould show a relatively easy ability to effect a gain in rateadequacy by excising such risks from their books," he said.

"This should be especially evident to those executives who takethe time to look in the small account and BOP [businessowners]segments of their business. We expect this business to startreturning to the surplus lines market near the end of this year,"Mr. Timm said.

No matter which of the seven stories executives picked as thepotential big story to impact their businesses in 2009, NAPSLOmembers said they are well-equipped to weather the storms ahead.(The list of seven stories is summarized in an accompanying textbox.)

"Widespread loss of jobs and loss of opportunities willencourage most [members] to revisit and implement the fundamentalsof success," said NAPSLO President John Wood.

"As strange as it may appear, this type of environment couldproduce more opportunities for the E&S business," said Mr.Wood, who is also president of Specialty Risk Associates inShreveport, La.

"We are ready to step in and serve our customers," he said,adding that NAPSLO is currently conducting a media campaign toinform retail customers of the value of wholesale brokers. "Throughknowledge, experience and expertise, we bring value to retailinsurance agents and corporate risk managers in placing specialtyinsurance coverage."

Giving the carrier perspective, the new head of the insurer thatranked as the largest E&S insurer in 2008, Peter Eastwood, CEOof Lexington Insurance, explained how his company prepares to dealwith the challenges that an economic downturn will create forinsurers in 2009.

"For our part, we need to understand that we cannot control thatwhich we cannot control. We must stay focused on what is within ourcontrol. 2009 will be the year of the underwriter," Mr. Eastwoodsaid.

"The carrier that is nimble and executes well, will weather thestorm. Those that do not may flounder."

"We must be nimble and focus on those areas where we believethat we have a competitive advantage both in capacity andexpertise. It is those qualities that we will rely on to maintainour underwriting integrity rather than engaging inexpedience-motivated underwriting that surely will come home toroost in future years," Mr. Eastwood concluded.

The responses of other NAPSLO members are detailed in a separatearticle titled "Members Sound Off."

NAPSLO members listed the following topics as potential topstories of 2009 when NAPSLO Daily reached out for predictionsrecently:

#1--It's The Economy, Stupid

#2--Claims Fallout from the Credit/ Subprime Crisis, Madoff-TypeSchemes

#3--A Harder Market Ahead

#4--Federal Regulation Comes To Insurance

#5--Economic Stimulus Boosts E&S Insurance Demand

#6--Insurers Work To Preserve Capital

#7--Standard Carriers Retrench From E&S Business