A.M. Best 2005 Review/Preview Property/Casualty Special Report: Anticipation Is Making Me Great.

OLDWICK, N.J. -- Expect the best, plan for the worst, and prepare to be surprised--sage advice for an industry that bases its business on the accumulation of risk, according to the A.M. Best Company.

No one could have foretold the devastation caused by Hurricane Andrew in 1992. Nor could anyone accurately have predicted a series of severe hurricanes would strike Florida in 2004 or that terrorist attacks of catastrophic proportions would be carried out in the United States in 2001. No prognosticators alerted insurers to the rise in tort costs in the late 1990s, or that several large companies would have been impaired by accounting irregularities about the same time. It wasn't even on anyone's radar screen that a lawsuit filed by the New York state attorney general would bring established business practices into question.

But the industry has learned from these events. Insurers developed mechanisms to prepare for similar events in the future, and they discovered the importance of thinking beyond known exposures. Consequently, insurance analysts have discovered that it is neither pessimistic nor foolish to anticipate misfortunes, but rather imperative in the business of risk accumulation.

In fact, it has become evident that it is necessary to evaluate the occurrence of multiple independent events simultaneously--despite their lack of correlation--identify how much the organization can afford to lose in total, and develop contingency plans for restoring capital and proceeding with business after an event occurs. In short, the industry needs to be alert: for the next trial of an insurer's financial strength and, consequently, its ability to capitalize on opportunities can come from anywhere. In today's fast-paced environment, new threats and opportunities arise faster and more often. Business leaders have to study the extended environment, including all who influence the industry's behavior and economics. In insurance, this is extremely broad. Nearly all aspects of day-to-day life affect the results of property/casualty insurers, be they economic, judicial, political, ethical, geological or meteorological.

To anticipate successfully, information gathering must be a real-time and continual process. Working down from the broad view of the external environment while working up from the knowledge of the individual company's strengths and weaknesses will provide the best opportunity to cover all the angles. Managing the unknown becomes a constant dialog that always questions and looks for the hidden risk.

Some of the trends A.M. Best anticipates for 2005:

--Rate adequacy and underwriting controls must be maintained to drive responsible competition;

--Flexible infrastructures will be necessary to stand by the commitment to walk away from underpriced business;

--Long-standing business practices, such as broker compensation, will change and transparency will increase;

--Catastrophe planning will remain at the forefront; and

--Economic indicators necessitate underwriting discipline to drive earnings in the near term.

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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.