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First Word: There are also unknown unknowns

First Word: There are also unknown unknowns

As I write this, rain is pounding the Chicago streets below our offices—strange weather for Chicago in January, though today's 50-degree high temperature was a little off kilter as well.

And, as the rain falls, I, like most of my co-workers, face the prospect of a soggy umbrellaless trip home after work. Why? Because this morning's weather forecast showed nothing but little sun icons for the rest of the week.

A forecast is, after all, nothing but a prediction, and even predictions based on the best information can go awry. Telling the future can be tricky business.

The new year, though, brings with it an inevitable desire to look ahead at what the future might bring. To that end, again this year we're offering an industry forecast, gathering expert opinion on what 2007 might hold for the insurance industry.

The start of the year is also often seen as a time for new beginnings, yet in the insurance industry, 2007 begins with many wondering whether the industry can hang on to what's come before.

The Property Casualty Insurers Assn. of America recently released its list of the top 10 stories of 2006, and the top two were closely related.

Number one was "A Year Without Hurricanes." Last year was the first since 2001 that a hurricane failed to make landfall in the U.S. That storyline contributed mightily, of course, to item number two on the PCI list: "Industry Financial Picture Improves During 2006."

This time last year, with 2005's hurricane experience fresh in mind, many worried about just how high losses could go in '06. Forecasts for 2006 were dominated by talk of higher ocean surface temperatures, increased tropical storm frequency, growing coastal property values and whether Katrina might just be the first act in an ongoing coastal windstorm drama.

Faced with 2005's experience, and predictions that things could get even worse, insurers and reinsurers responded in logical fashion. Strict adherence to sound underwriting drove up rates and reduced capacity for cat coverage.

The results were dramatic. In the Insurance Information Institute's Earlybird Forecast 2007, Robert P. Hartwig, the III's president and chief economist, wrote that "the respite in catastrophe losses in 2006," coupled with strong performance across other property/casualty lines, "will propel the industry to its best underwriting performance since 1955."

There's another shoe, though, and the III president lets it drops. While analysts expect P/C industry profitability to continue in 2007, Mr. Hartwig notes that they also expect insurers' underwriting performance "to generate a much smaller underwriting profit," with premium growth becoming "even more sluggish in 2007."

Beyond the fact that industry fortunes are ultimately shaped by a variety of different factors, many of them beyond the control of even the most powerful insurance executives, the problem, Mr. Hartwig writes, is "the highly cyclical nature of the property/casualty business." Indeed, the III's forecast finds that aside from hurricane-exposed property risks, P/C prices are softening across-the-board.

Darn that cyclicality.

Or as Sean Mooney, Guy Carpenter's chief economist, tells Senior Editor Meg Fletcher in this issue, "Historically, the industry gives its gains away."

On the life side, meanwhile, most experts expect steady growth. That doesn't mean there aren't potential concerns. Stranger-originated life insurance is one. And don't forget external factors—remember last year's worries about avian flu?

Ultimately, forecasts can be useful things, and it's natural that we seek them out as we prepare for a new year—or the commute to work. But I guess it's important to remember that reality—like the weather—is always subject to change.