NU Online News Service, Oct. 12, 3:10 P.M.EDT

ORLANDO, FLA.--Economic cycles andunderwriting cycles historically have little connection with oneanother, an industry expert said at a gathering of surplus linesinsurers and brokers here.

Robert P. Hartwig, president of the New York-based InsuranceInformation Institute, provided that analysis during a speechFriday at the annual meeting of the National Association ofProfessional Surplus Lines Offices, Ltd. during the DerekHughes/NAPSLO Educational Foundation Lecture.

Mr. Hartwig devoted part of his time to the identification ofindustries and regions with potential growth prospects for excessand surplus lines market participants in the near term.

"The reality is there's not a strong association between whatgoes on the in the economy and what goes on in our business," headded, noting the recessions have historically occurred togetherwith both hard and soft markets.

Highlighting the workers' compensation line as one area impactedby the economic recession, Mr. Hartwig said the underwriting cyclehas had a bigger effect for insurers.

"As wages, salaries and payrolls fall, that is something that iscontributing to a decline in workers' comp premiums, although mostof that is driven by what is going on in rate--very competitivepricing in workers' comp," he said.

While industry capital plummeted with investment losses lastyear, and capital losses are typically a precursor of hardermarkets, "something else has to change--the perception of risk," hesaid.

Elevated insurance combined ratios--in the 115-to-120range--have historically changed risk perceptions and heralded thereturn of hard market pricing, but Mr. Hartwig said he doesn'tforesee the industry coming close to those levels in 2009.

Last year, he said the p&c insurance industry ran a 101combined ratio overall (excluding mortgage and financial guarantyinsurers). This year, the industry has been running a 99.5 combinedratio--and even adding a few points to eliminate boosts fromreserve releases related to prior years won't bring the numbers toanywhere near the dire levels they reached a decade ago, hesaid.

Offering a different interpretation of combined ratio numbers ata later Friday session, Jim Carey, president and chief executiveofficer of Admiral Insurance Company in Cherry Hill, N.J., startedhis own analysis with the reported industry combined ratio of 105for 2008.

Taking out two points of catastrophe losses that probably won'trecur, Mr. Carey said, "in this business, if you don't get a priceincrease, your claims go up 5 or 6 percent for inflation--taking a103 starting combined ratio to 108 or 109 for 2009.

Another year of flat pricing and loss inflation brings thecombined ratio figure to 112-to-115 for 2010, he said. "We'reheading for some pretty tough times [and] underwriting losses willerode capital."

While all companies won't be equally affected, Mr. Careyasserted, "There will be pain. There will be noise, and that's whatalways happens. For the markets to change, you've got to feel thepain."

At the earlier session, Mr. Hartwig said that "something that'snot being watched at all--something that can turn the market--is anemerging tort threat."

"There has not been one iota of tort reform" since the makeup ofCongress changed in 2006, he said.

While industry commentators periodically point to insurancecompany failures as a precursor of a market turn, Mr. Hartwig isn'texpecting that kind of fallout to occur directly as a result of theeconomic recession.

"The industry tends to weather economic downturns well," hesaid, pointing to statistics from a recent A.M. Best reportprepared for NAPSLO that shows the No. 1 cause for insolvency isloss reserve deficiency, not economic phenomena.