Execute or perish: insurers face two possibilities: a gradual slowing of rate increases leading to a period of stability, or a return to the competitive excesses of a soft market.

In 1990, more than 1,270 property/casualty insurers served the U.S. market. Today, fewer than 940 remain. Despite the strongest pricing environment in more than a decade, property/casualty insolvencies jumped from 30 in 2001 to 38 in 2002. Reliance, The Home and many others who failed or left the business remind us that zero-sum competition in mature property/casualty markets is an unforgiving game.

What must those who remain do to survive and thrive? Analyzing the industry's still-incomplete recovery from a decade of lackluster results delivers some answers.

The industry's first-half combined ratio--losses and other underwriting expenses per premium dollar--improved to 99.8%. Buoyed by strong underwriting results and improving investment gains, net income rose to $14.5 billion in first-half 2003 from $4.4 billion in first-half 2002. Annualized return on average surplus rose to 9.7% from 3.1%. And surplus grew $28.1 billion in first-half 2003 to $312.5 billion.

Despite these "good" results, industry income remains 2.5% below its first-half 1999 level and 22.5% below its first-half 1997 level. The annualized rate of return remains less than two-thirds of the 15% annualized rate of return for first-half 1987 and surplus at mid-year 2003 was 7.9% below its peak of $339.3 billion at June 30, 1999.

Will the current hard market last until carriers regain their past profitability and surpluses? Insurance Services Office MarketWatch data show premium changes on renewals for commercial lines policies peaked at 12.9% in July 2002 and have been heading downward since.

Property/casualty insurers face two possibilities: a soft landing, with gradual slowing of rate increases leading to a period of stability, or a return to the competitive excesses of soft markets.

With history as our guide, consider a few simple truths:

* The next soft market may be just over the horizon. For more than 40 years, each improvement in insurers' results has brought us closer to the next outbreak of hyper-competition for market share. Since 1960, insurers have witnessed only one period of double-digit premium growth lasting more than two years. ISO projects premium growth slowing from 14.3% for full-year 2002 to 9.2% for full-year 2003 and just 6.1% for full-year 2004.

* When hard markets give way to competitive excesses, profits deteriorate. The five years of double-digit growth insurers enjoyed from 1975 to 1979 triggered a soft market and the industry's worst-ever combined ratio--118%--in 1984. Return on surplus shrank to 1.3%. Those results led to dramatic firming in premiums, with all-lines premium growth soaring to a record 22.2% in 1985 and 1986. But, again, a hard market had sown the seeds of its own destruction, with the industry slipping into the most protracted soft market in history. Premium growth fell to just 4.4% in 1988 and remained below 5% in 11 of the 12 years from 1988 to 1999, hitting a record low 1.8% in 1998. Despite booming stock markets, return on surplus averaged just 8.7% in the 1990s--down from an average 10.3% in the 1980s and 13.7% in the 1970s.

* Insurers can't count on investment gains to offset underwriting losses during the next soft market. Growth in investment income dwindled from 18.7% a year in the 1970s to 12.8% a year in the 1980s, and 2.2% a year in the 1990s. Annualizing results through six-months 2003, investment income has fallen at an average annual rate of 1.7% thus far this decade. And insurers cannot rely on capital gains from rising markets to paper over underwriting losses. The S&P 500 declined during the first three years of this decade, falling at a compound average annual rate of 15.7%, and insurers suffered $35.2 billion in capital losses.

* Insurers have paid dearly by not adhering to disciplined underwriting and cost-based pricing. The average number of insolvencies rose from 12 a year in the 1970s to 27 a year in both the 1980s and 1990s. For the first three years of this decade, there has been an average of 33 insolvencies a year.

Each improvement in results brings us closer to the next soft market. To achieve sustainable profitability, insurers must execute against core fundamentals--solid underwriting, cost-based pricing and sound loss adjudication. Otherwise, they will perish on the altar of market share and absolute dependence on investment gains.

Ask those who were driven from the field.

Frank J. Coyne, a Best's Review columnist, is chairman, president and chief executive officer of Insurance Services Office Inc. He can be reached at [e-mail].