A decade of cutthroat pricing and excess capacity has taken its toll on property and casualty companies. In 1999 alone, this benighted sector lost nearly 26% of its stock market value. But the outlook improved steadily last year, and prospects for 2001 are upbeat: Premium growth should hit 7%, suggesting that the industry is now expanding at the fastest rate in 15 years.

Insurers are showing signs that they are no longer shredding prices just to win business or gain market share. Property and casualty (P&C) carriers have been through years of price-cutting and are stuck with huge underwriting losses. And this year, auto insurers are anticipating higher costs--they are increasingly unwilling to pay for cheaper, generic replacement parts for repair jobs, opting instead for name brand components. Against this backdrop, P&C carriers have no choice but to end the price wars.

Medical insurers find themselves in a similar predicament, as some of their top reimbursable expenses are raging out of control. "The pace of medical inflation is up more than 50% since 1997," says Robert P. Hartwig, vice-president and chief economist at the Insurance Information Institute.

Insurers will lose no time passing along these higher costs to their policyholders in the form of higher premiums. Already in 2000, consumers were hit with higher auto premiums for the first time in three years. This year, "personal auto rates generally are edging up," says Hartwig.

SIGNS OF LIFE. Rising premiums may pinch consumers' pocketbooks, but they're good news for the industry, which depends on them as a chief source of revenue. In addition, investment earnings are rising. Thanks in part to higher interest rates and increased earnings from bonds, investment income grew by 2.2%, to $29.2 billion through the first nine months of 2000, compared with a 3.3% drop in all of 1999. With the stock market swooning, bonds will continue to look bright--and will brighten the prospects of insurers' bond-heavy portfolios.

Amid these signs of life in the P&C business, some big mergers took center stage in 2000. Dutch giant ING Group showed a huge appetite for life insurance and wealth-management companies, snapping up ReliaStar Financial (RLR) in Minnesota and a large chunk of ailing Aetna Inc. (AET) This year, large European insurers will continue to seek stronger positions in the U.S. John S. Scheid, a partner in PricewaterhouseCoopers' global insurance practice, singles out Germany's Allianz (AZ) as a company with plenty of capital and a strong appetite for deals. "I can see them doing acquisitions in both P&C and life," he says.

Along with rising premiums and ongoing consolidation, cost savings have taken on renewed importance for both insurers and their clients. As in other industries, the Internet is emerging as the key to lower transaction costs. The Web allows customers to research, price, and maintain policies faster and more cheaply than in the past. Consumers are trying out Web sales in growing numbers. Policies sold via the Net doubled in 2000, to $2 billion, and are on track to hit $3 billion in 2001.

A few question marks hang over the industry. The growth of sales over the Net is encouraging, but these add up to a tiny percentage of the $302-billion P&C arena. It seems that consumers ultimately still prefer to seal a deal in person with an agent. The complexity of insurance products, and the old question of trust, mean that big-brand names such as Geico or Progressive still carry more weight than their purely online brethren, such as startup auto insurance company Esurance. "U.S. consumers are buying on the basis of brand," says PricewaterhouseCoopers' Scheid.

Another concern is the economy. Housing starts are slowing, fewer new cars are being bought, and unemployment is expected to inch up--all of which spells trouble for sales of new policies, points out the Information Institute's Hartwig. For now, though, insurance executives are confident that better pricing, mergers, and Net efficiencies will give the industry room to recover, even if the economy is slowing.

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