"There are currently at least three views on the hard market and how long it would continue," said Patrick Mailloux, head of U.S. Direct, Americas division for Swiss Re, during his talk at the annual conference held in New York.

First, there is the doom-and-gloom view, which is basically a resigned approach of, "It's already over, forget it; it has come and it's gone." Then there is the desperate-harvest-of-a-dying-bloom scenario, which says, "It might last through 2004, but after that, it's pretty much over."

But the scenario that Swiss Re champions is one that says the hard market will last through 2005, "and probably well beyond that."

Mr. Mailloux said his company's scenario offers the "most realistic" forecast for a number of reasons. He told conference participants that while the industry is returning to underwriting discipline, the return on equity for the U.S. p-c industry is still dismal.

The return on equity for the industry in 2002 was 3.2 percent, he observed. "Now, for anyone to suggest that that is the height of the hard market, that the best we can do is 3.2 percent ROE and that we are going to massive softening going forward, is a very sad statement on our industry."

The p-c insurance industry's return on equity wasn't always this bad. For example, from years 1980 to 1999, the industry had 10.1 percent ROE, compared to 13 percent for all other industries. "So we were right in there. We were doing okay," Mr. Mailloux recalled.

But a return on equity at rock bottom, Mr. Mailloux said, is not the sort of sign one expects with an industry that is at the peak of a hard market. "My contention is that we are much more an industry that has transitioned into the hard market and will ride this hard market for a number of years well beyond 2005," he said.

Complicating the problem is the fact that insurers can no longer rely on their good old cash cows--investment income and realized capital gains--to buttress their bottom line. In the past, underwriting has been "a profit destroyer" which was propped up by "profit creators," Mr. Mailloux said.

But, Mr. Mailloux said, when the industry looks at what is happening in the last couple of years and into the future, these profit creators, investment income and realized capital gains, are much lower.

And when one looks into unrealized capital gains, which is the "bank" companies can dip into to realize capital gains, insurers during the mid-to-late-1990s had significant unrealized capital gains that they can draw upon to improve profitability. "But in most recent years, the industry is in unrealized capital loss position, so one of our profit creators is comprised," Mr. Mailloux said

And then there is the problem of adverse developments that continue to plague the industry. "Nowadays, you can't pick up an article in this industry without reading about adverse development. This is how significant adverse development has been on our results," Mr. Mailloux said.

Looking back, though, the industry in fact had benefits from reserve developments through the late 1990s. "We had benefits from reserve developments. We used to have favorable reserve development which really lowered combined ratio by up to four points," but, he said, the reverse has happened in the last few years, where companies were taking hits and strengthening reserves.

"In 2002, for example, the industry had added up to six percent or even higher in combined ratio as the result of reserve strengthening," Mr. Mailloux said .

Another concern is the surplus level for the p-c industry and the fact that the sector has not added to its surplus since 1998. "As a matter of fact, the surplus has been reduced by several billions of dollars," Mr. Mailloux observed. "So no wonder the buzz word right now is security. Everybody wants to know that they have security when they deal with insurers or reinsurers."

Another challenge insurers have to constantly wrestle with, Mr. Mailloux commented, is the loss inflation. Looking at jury verdicts, some lines of business such as medical malpractice and product liability have seen the level of verdicts shoot up 100 percent or 200 percent in less than 10 years.

So what does all this mean? "It continues to put tremendous pressure on underwriting," Mr. Mailloux said, with emphasis on rate increases.

The good news, though, he said, is that 1999 seemed to be the bottom in terms of prices. "Since then, we have seen healthy increases in rates. There has also been a tightening in terms and conditions," he explained. "So when you are looking at rate increases, you have to put that into perspective of the exposure, which is also diminishing. So the net price increase per exposure is more significant," said Mr. Mailloux.

A very good thing happened in this process--the p-c industry is now "reprogrammed" to generate profits not from investment income and realized capital gains, but out of very tight underwriting, which will help keep the hard market around longer than what doom-and-gloom sayers predict, Mr. Mailloux said.