Sure, but continue to watch out for those bears. One fear looming on the horizon: the prospect of another terrorist attack. While the Terrorism Risk Insurance Act of 2002 provides a federally funded backstop against massive losses, that protection is scheduled to run out in 2005. That means insurers and property owners will start to grapple with the true price of terrorism protection toward the end of 2004. The war in Iraq and a rise of suicide bombings in other parts of the world have made many industry observers believe it's only a matter of time before more attacks take place on U.S. soil. In late December, U.S. authorities raised the country's terror alert to high, citing intelligence suggesting the possibility of a spectacular attack that could rival the impact of September 11. Insurers took a $40.2 billion hit in those attacks.
Another challenge that's weighing on the minds of insurers and the insured is the escalating cost of lawsuits covering everything from asbestos claims to medical malpractice. Tillinghast-Towers Perrin reports that tort cases in the U.S. racked up $233 billion in costs in 2002 -- the most recent data available -- which is equal to 2.23% of gross domestic product, or $809 for each U.S. citizen. Efforts to cap costs haven't made much progress in Congress, although there have been some successes at the state level. Medical malpractice reform in Texas, for example, has already prompted insurers there to lower their rates, and reforms in other states could lead to similar results.
The improved outlook means that insurers are once again jostling for market share. "With better results, plus a desire to get better returns on capital, you have to write more business," says Michael D. O'Halleran, president and chief operating officer of Aon Corp.(AOC
). Aetna Inc. (AET
) is a good example. After shrinking its membership rolls from 21 million to 13 million over the past three years to rid itself of unprofitable business, the Hartford health insurer is starting to add members again. "We have turned the company around," says Chairman and CEO John W. Rowe. "Now, we have to prove we can grow again."
Improved margins and valuations are prompting more consolidation on all sides of the business. With overall revenue growth hard to come by, insurers are intent on bulking up. They're convinced that size will bring economies of scale, cost reductions, and better margins. Diversity and size are also a boon in an age of widespread litigation and uncertainty. As O'Halleran puts it: "While things are getting better, this is still a fragile industry."
Maybe so, but insurers are still basking in their newfound luck. "Look at the results," says Fred R. Donner, insurance-industry practice leader at KPMG LLP. "We have been through a year of little activity on the catastrophe side, and investment returns are coming back." Everyone is grateful, on both those scores -- none more so than the insurers. By Diane Brady in New York