ISO and NAII also noted that the industrys underwriting results have gotten much better, with overall net losses on underwriting down 68.8 percent to $5.7 billion for 2003s first nine months, compared to the same period the year before.

“Overall, these results are good. They are very positive numbers. Its nice to see big improvements in underwriting after a decade of underpricing. So that was very encouraging,” John Kollar, vice president for consulting and research at the Jersey City, N.J.-based ISO, told National Underwriter.

During the first nine months of 2003, underwriting results improved as premium growth outpaced growth in losses and loss-adjustment expenses, other underwriting expenses, and dividends to policyholders, Mr. Kollar explained.

Furthermore, “underwriting improved even though there were significant catastrophe losses,” he observed. “But still, the overall numbers were the best we have seen for several years. So you have to be happy for now.”

Additionally, insurers investment incomeas well as realized capital gains and total capital gains–is on a positive track. The industrys net investment income–mostly dividends from stocks and interest on bonds–showed better results, reaching $27.7 billion for the 2003 nine-month period, a modest but welcome 3.2 percent jump from the year before, the report noted.

“I think the improvement in investment income will continue at least for the short term, and probably will go on longer than that,” Mr. Kollar predicted. “There is more money to invest from improved underwriting cash flows, and insurers should be able to continue to grow total dollars of investment income.”

Industry surplus also made a net gainup 12.1 percent to $319.9 billion at the end of 2003s third quarter, compared to the year-end 2002 period, when the industry had $285.4 billion in surplus.

Mr. Kollar also told National Underwriter that the industrys annualized rate-of-return on average surplus rose to 9.3 percent during 2003s nine-month period, up from 2.4 percent during the corresponding period in 2002 and a dismal, negative 1.1 percent reported in 2001.

“The significant improvement in underwriting and overall results through nine-months 2003 is very welcome,” said Don Griffin, assistant vice president for business and personal lines at the Des Plaines, Ill.-based NAII.

“To insurers credit, much of the progress to date reflects increased attention to fundamentals of our business–solid underwriting, cost-based pricing and careful claim settlement,” he added.

The industrys underwriting results are expected to improve even further, as rate hikes “continue working their way into earned premiums and down to insurers bottom line,” according to Mr. Griffin.

However, these encouraging developments in the marketplace are accompanied by opposing, less-encouraging trends, which could make 2003 the year of “Yes, but,” these officials warned.

For example, while insurers have been paying more attention to the underwriting fundamentals of the business, Mr. Griffin said it is far from certain that companies will continue to maintain that self-discipline as price competition heats up.

“Now, the $64,000 question is how long will insurers maintain their focus on the fundamentals?” Mr. Griffin noted. Each improvement in insurers results makes it that much harder to “resist the temptation to ignore the fundamentals and go for market share,” he commented.

ISOs Mr. Kollar said his group and NAII share similar concerns, “and that is that companies will aggressively compete for business and cut prices below costs in 2004.”

The boost in net income and the growth in industry surplus confirm the p-c sector's continuing recovery from the soft markets of the late 1990s, but the hard market is “already showing its age,” Mr. Kollar warned.

He pointed out, for instance, that the industrys net written premiums reached $308.6 billion for the 2003 nine-month period, up $28.3 billion from the corresponding period in 2002. While this represents a strong 10.1 percent improvement, its still lower than the 13.8 percent annual gain in net written premiums the industry posted during first nine months of 2002.

Whats more, Mr. Kollar added, ISO data shows that rate hikes on renewals of commercial policies are losing momentum. “Rate changes on renewals first turned positive in July 1999 and accelerated for three years, peaking at 12.9 percent versus year-ago levels in July 2002,” Mr. Kollar recalled. Since then, however, rate hikes on renewals have been decelerating, falling to just 7.7 percent last June.

“Recent market surveys suggest that rate increases have continued to moderate, with rates for some coverages and market segments now flat-to-down,” he observed. “All else being equal, insurers will have an increasingly difficult time maintaining growth in net income as rate increases wane.”

There are also reports from brokers that “show slippage” in some of the prices, Mr. Kollar noted. “So its like, Weve been here before, and we can see it happening again. The question now is how quickly it will happen.”

He acknowledged it is still hard to predict whether the market softening will commence this year. “Some commercial lines could soften up first. There are a lot of writers and no one has that large a share of this business, so there could be competition here first,” according to Mr. Kollar. “Hopefully, this will be a gradual softening, so that the impact won't be too drastic and get too far out of control.”

Another major problem for the p-c industry in 2004 is its loss-reserve position, noted Mr. Kollar, who predicts that “there will be significant reserve additions.”

“There have been quite a bit already, but there could be substantial additions [to reserves] for the fourth quarter [of 2003] and in 2004. Some companies still have more catching-up to do,” Mr. Kollar forecast.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 2, 2004. Copyright 2004 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.