Yesterday, we presented a light-hearted take on what's in store for theproperty and casualty insurance industry for the year ahead. Today,we'll get more serious, with two senior editors of NationalUnderwriter—Managing Editor Susanne Sclafane and WashingtonEditor Arthur "David" Postal—weighing on likely developments inWashington and the prospects for a market turn in 2011.

First up is David, who offers some pessimisticpredictions about the fate of the National Flood Insurance Programand other issues that will make their way to Congress. 

"Congressional activities will be moderate, butSanta is unlikely to be able to give the insurance industry thegifts it dreams of having under its tree at the end of 2011," hepredicts.

"Specifically, negotiations over long-termreauthorization of NFIP are likely to be caught up in concernsabout the high cost to voters of 'market reform' and remapping,creating the need for another extension of the current program whenit expires Sept. 30," David believes.

On other matters, he predicts:

• Congress is unlikely to deal withtax reform next year, leaving open the question of added taxes forforeign insurers.

• The battle by insurers to keepfederal regulators at bay will continue unabated as the rules ofthe Dodd-Frank financial services law are implemented. But the headof the new Federal Insurance Office will be named, the office willstart to take shape, and an independent insurance representative tothe Systemic Risk Council will also be named—all in the firstquarter.

• Implementation of the surplus linesreforms—through an interstate compact that is acceptable to theindustry—will not occur by the June deadline. This issue will dragon because states starved for revenue will not agree to a deal,fearing critics will charge a particular state is beingshortchanged.

• The insurance market will be stablein 2011, with employment and prices unlikely to risesignificantly.

I don't consider myself an eternal optimist,but I find myself disagreeing with David on each of the last twoitems.

Maybe wishful thinking is clouding my view, buthaving covered the efforts of the industry to streamline regulationand taxation of multistate surplus lines transactions for more thana decade, I think the various trade groups involved have themomentum to see this one of the finish line of implementation.David's view that protectionist states will remain short-sightedignores the fact that this is the first test of state cooperationover an insurance matter that has federal eyes glaring on it, aswell as a GAO study of the market forthcoming.

As for David's market prediction, while stableisn't a totally dismal outlook, I'm in the minority camp of thosewho foresee a market turn coming this year. 

As a former actuary, the reports I read aboutreserve cushions dwindling are compelling, but without the benefitof rigorous analysis to support my view, I offer two alternativereasons for my forecast.

First, while the naysayers point to excesscapital as a force that will keep the market soft, history showsthat too much capital comes with a temptation to put it too work inways that don't always make sense. It is likely that some insurershave made unintelligent decisions about how to deploy the excess.With other forces at play—such as week investment earnings andpotential catastrophe losses—"the industry is teetering," analystsat Keefe Bruyette & Woods said in a recent report.

The KBW analysts and I part company, however,with the investment analysts saying a 2011 turn is unlikely. Theypoint, in part, to rising accident-year loss ratio picks and thepossibility of "management conservatism."

My own past experience in reviewing the lossreserve adequacy of insurers and reinsurers in both hard and softmarkets reveals that management teams do not intentionallyovershoot on loss picks, suggesting that rising loss ratios areevidence of actual deterioration.

I'll admit, however, that my experience on thismatter is not very recent. As a magazine editor, I don't have thetime to pore of loss triangles like I did more than 15 years ago.These days I rely on quicker, easier tests as prediction metrics.For example, I look at the results of a mainstream insurer withtypical soft market coping strategies (whose identity I won'treveal) and watch for its commercial lines combined ratio to reach105.

It did for the first nine months of 2010, whichsuggests the turn is coming soon.

Sounds arbitrary, but it worked flawlessly tohelp me foresee the last turn.

Managing Editor

Susanne Sclafane