IF YOU want to know where the insurance market is headed, Frank J. Coyne, chairman, president and CEO of Insurance Services Office has some familiar advice for you: Follow the money. In this case, the money in question is insurers' surplus, or net worth. At the American Association of Managing General Agents' annual convention, which was held in May in Maui, in the Hawaiian Islands, Coyne made the case that a drop in surplus in the third quarter of 1999 set off a hard market and that its recovery in the last few years has led to today's steadily softening rates. (The exception, of course, is for property rates in catastrophe-prone areas.)

"The short explanation for both hard markets and soft markets is supply and demand," said Coyne, who proceeded to focus on the former. "The supply of insurance depends on insurers' capacity to provide financial protection," he said. "Insurers' capacity depends on their surplus."

According to charts Coyne presented, insurer's surplus started falling in mid-1999, from approximately $341 billion, and bottomed out a year after 9/11 at roughly $273 billion. Since then, however, it's risen steadily. "With industry (surplus) having risen to a record high $427 billion at year-end 2005, no one should be surprised that insurance markets are softening," Coyne said.