Insurance is a complex business, but it all boils down to this: To be financially successful, carriers must collect enough premium dollars to cover claims and expenses. The tricky part, of course, is maintaining underwriting discipline in a competitively charged market when annual premium increases begin to decline.That, in essence, is where the property/casualty market stands today. The financial turnaround that has been achieved during the past three years is remarkable: In 2001, the combined ratio for U.S. P&C insurers was a staggering 116. In the aftermath of the September 11 terrorist attacks, industry economists believed that the financial aftershocks would hurt balance sheets for many years. They were dead wrong.

The P&C industry posted a combined ratio of 97.9 for the first nine months of 2004, compared with 100.3 during the same period in 2003. The industry's net income soared 28.3% to $26.7 billion during the first nine months of 2004, and the industry's surplus rose 6% to $369 billion at the end of September.

Although much of the financial improvement can be attributed to the firming of premium prices post-Sept. 11, insurers' renewed focus on underwriting discipline was a major factor in the industry's financial turnaround. Case in point: Prior to 2004, the industry posted net losses on underwriting during the nine months of the year every year since 1986. In 2004, the industry posted an underwriting surplus of $2.85 billion, and that's despite the four Southeast hurricanes that caused more than $21 billion in losses.

Underwriting is a theme throughout this month's issue, beginning with our special supplement, which includes a case study on a Web-based system for agents that features automated underwriting tools. Teleunderwriting is the topic for Statistically Speaking, and Gartner Inc.'s Kimberly Harris discusses technology and underwriting optimization in this month's Last Word column.

The P&C industry certainly has come a long way in three short years, but before executives get too excited, there are dark clouds on the horizon for 2005. Premium growth slowed to 4.5% during the first three quarters of last year, less than one-half the growth rate during the same period in 2003. Indeed, the specter of rising inflation and weakening pricing looms large over the industry this year, all the more reason to be vigilant when it comes to underwriting.

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