Wall Street analysts are predicting a solid 2004 for the U.S. insurance industry, according to the annual “earlybird forecast issued by the Insurance Information Institute (III). Analyst tell the III that a combined of premium growth and investment market recovery could produce a “Goldilocks” market in 2004, when the perfect storm of the past couple years is turned around. New written premiums are predicted to grow about 8.1% next year based on the average forecast, not only as a result of rate increases, but also increased demand for coverage in light of overall economic recovery. This premium growth is strong, but nonetheless slower than in the past two years, which saw growth between 10-14% annually. A double-digit return on equity is expected in 2004 on the back of underwriting performance and investment improvement in both capital gains and yields on bond portfolios. The industry’s combined ratio is also expected to improve to 100.7%, down a point from 2002, and well below the 115.7% recorded in 2001 on the heels of the 9/11 terrorist attacks. However, this means 2004 will still see an overall underwriting loss, and this is assuming no terrorist attacks or above average catastrophe activity. The III report notes that the industry’s recovery from five years of poor results has been “slow, difficult and dangerous”. The combination of events that made up what has been termed the “perfect storm” included rising jury awards, asbestos claims, medical cost inflation, high cat losses, corporate governance crises, investment declines, terrorism and a substantial loss of industry capacity. “Needless to say, not all of these problems have been completely vanquished,” notes III senior vice president and chief economist Robert Hartwig. “Insurers and their allies failed to get tort reform or asbestos legislation through Congress in 2003, medical inflation remains rampant, catastrophe losses in 2003 were the third highest in history and the threat of a terrorist attack is omnipresent.” He adds that while investment returns will likely be stronger in 2004, they are unlikely to repeat the 20%-plus stock market gains in 2003. Hartwig says 2004 will see pricing that is “neither too high nor too low”, only a slow rise in interest rates and opportunity for insurers to compete for new business as the economy recovers. He points to fears of a return to price competition as a potential downfall, one which prompted analysts to vary widely in their projections for 2004 premium growth. There are also persistent concerns over financial security following on the record number of insurer insolvencies in 2002. “While some insurers and reinsurers find themselves in a much more precarious situation than their peers, the industry overall does not appear to have yet hit a ratings trough.” The biggest concern heading into 2004 remains skyrocketing tort costs. With Tillinghast-Towers Perrin recently noting that insurers paid US$165.8 billion in tort costs in 2002, the stability of the casualty market will be directly impacted by the ability to move forward on tort and asbestos reform.