Add to that passage of the Terrorism Risk Insurance Act, giving carriers a desperately needed federal backup, as well as the Republican takeover of Capitol Hill, which holds out the hope of tort reform, and p-c insurers seem to have reason to party. Yet it was a somber mood indeed at the Forum this year, fueled by a number of long-term and looming problems, including:

Uncertainty over whether the terrorism backstop, which forces carriers to at least offer to write the risk, will actually make coverage affordable. If the law fails to do the trick, policyholders, state regulators and the U.S. Congress will be furious, and they could come down on the industry with a vengeance.

Concern over whether the industry can generate a return-on-equity that will attract badly needed capital. The industry's combined ratio through three quarters last year dropped from 114.4 to 104.9. However, those here seem to agree that a ratio in the low-to-mid-90s is required to post an ROE in the mid-teens–the minimum necessary to attract new capital. The consensus is the industry will have a hard time getting its ROE above the high single digits, especially if investment returns are flat or down.

Speaking of investments, insurers and analysts here were very bearish. While the stock market has rebounded of late, any upsurge will be short-lived if war with Iraq breaks out, many here noted. Meanwhile, bonds, with interest rates at historic lows, will deliver a double-whammy to insurers, especially with a host of higher-yield holdings turning over at far lower returns.

Further reserve adjustments would put an added burden on struggling carriers and make attractive ROEs even harder to attain. On the day of the Forum, Travelers announced a $2 billion boost in asbestos reserves, sending a chill through the crowd of CEOs here. “Travelers clearly set a new standard for reserve adequacy and disclosure today, and other companies will have to scramble to catch up,” warned Alice Schroeder, managing director at Morgan Stanley in New York, during an analysts' panel discussion.

The reinsurance market, particularly in Europe, is in a very weakened state, thanks to the long-term impact of soft market pricing, mounting catastrophe losses, and steep stock market declines. That means primary carriers will have a harder time laying off risk, will have to hold onto more exposure themselves, and will have to pay more for reinsurance coverage.

Insurers here were skeptical about the prospects for passage of significant tort reform to get asbestos, medical malpractice and other troubled lines under control, even with Republicans taking control of the U.S. Senate, and an M.D. as Senate Majority leader. Indeed, in a poll of the 200 or so executives in attendance, 76 percent said Washington would not deliver “meaningful” tort reform, while 86 percent said they expect no civil justice relief on the asbestos front either.

Insurers here were also tense because of increasing pressure from stock and rating analysts. There are a lot more probing questions being asked, they reported, and they fully expect more downgrades. Analysts are in no mood to give any insurer the benefit of the doubt, not with under-reserving still a big issue.

What does this all mean, based on the assembled wisdom here?

Basically, it's back to basics. For the foreseeable future, insurers are in the insurance business again. Rather than live off cash flow and investment returns, they must write insurance for a living, and that means writing at a profit. Underwriting, claims handling and litigation management must be meticulous. There is no margin for error.

That leaves one more fear cited by the CEOs here–whether insurers have the intellectual talent, discipline and skills to get the job done. Joseph Brandon, chairman and CEO of General Reinsurance Corp. in Stamford, Conn., spoke here about an “execution challenge” facing the industry, bemoaning that insurers had allowed some of their basic skills–underwriting, claims, actuarial–to “atrophy” during the soft market.

It's no wonder that no one here struck up a chorus of “Happy Days Are Here Again” after hearing this litany of despair, and you can't blame insurers for assuming the worst with so little light at the end of the tunnel.

Still, it's quite possible that a year from now we'll have something to cheer about–Congress might deliver tort reforms; the bulls may return to Wall Street; and there hopefully won't be further terrorist attacks, major natural disasters, or war with Iraq. Just don't count on it.

Insurers can only count on themselves. They must hunker down and control as much of their own destiny as possible by writing coverage at a healthy profit. If they can pull that off, they will have a real reason to party.

Sam Friedman is Publisher and Editor-In-Chief of National Underwriter. He may be reached at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 20, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.