BOSTON-The hard market will continue until insurance companies return to financial health, three surplus lines executives predicted this month.

Under current conditions, a turn in the market might not occur until 2004, said R. Max Williamson, the president and chief operating officer at Scottsdale Insurance Co. in Scottsdale, Ariz.

Last year, the property/casualty industry lost $8 billion and had a combined ratio of 116%, Mr. Williamson told attendees at the in Boston. The forecast for this year is 108%, despite sharply rising rates. The last year the industry had a combined ratio under 100% was 1978, he said.

Mr. Williamson noted that the reinsurance industry also had a terrible year in 2001. Its combined ratio of about 140% was the highest in over a decade. None of the 10 largest reinsurers had a combined ratio under 100%. "So, as you can see, we don't have stellar performance yet in the industry," he said.

The poor results have lowered insurers' return on equity, Mr. Williamson said. In 2001, total insurers' return on equity stood at a negative 8.1%, he said, compared with a 23.3% return on equity in 1997.

So while rates are up, they still are not sufficient to get combined ratios down to between 90% and 95%, the range needed to push return on equity to an acceptable level of 10% to 12%, Mr. Williamson said. "We're in a significant hole and don't see that improving," he said.

Rates will continue to rise until combined ratios drop significantly, Mr. Williamson said. "We have to return to profitability," he said.

Part of the problem is the rising wave of claims hitting insurers, said Patricia Roberts, the president and chief executive officer of General Star Management Co. in Stamford, Conn. "Understanding the wave is absolutely critical to survival," Ms. Roberts said.

The number of mass torts and their size continue to climb. In addition, claim trends continue to increase, she said.

Asbestos claims and costs are up, and more claims continue to pour in, Ms. Roberts said, noting that 90,000 new claims were filed against the Manville Personal Injury Settlement Trust last year. That trust was set up in 1987 to handle claims against bankrupt Denver-based asbestos producer Johns-Manville Corp. as part of its Chapter 11 reorganization.

She said that the list of targets in asbestos suits has also expanded as plaintiffs look for companies with deep pockets to sue.

Jury awards also continue to rise, as does the cost of litigation. For example, the number of million-dollar awards is growing, particularly in New York and Pennsylvania, where 20% of the awards are for over $1 million. In Mississippi, the figure stands at 24% for 2001, Ms. Roberts said, citing figures compiled by Jury Verdict Research of Horsham, Pa.

Product liability and medical malpractice are the hardest-hit areas. According to Jury Verdict Research, the percent of product liability awards over $1 million rose from 40% in the years 1994 through 1996 to 63% in 1999 through 2000. Medical malpractice awards over $1 million grew from 34% to 52% when comparing those periods.

"The frequency and severity is up, and that's a deadly combination if you're trying to make an underwriting profit," Ms. Roberts said.

The medical malpractice market has contracted greatly and there are now a limited number of players, she said. "Many doctors are now in the non-admitted market," she said.

Construction defect claims are also a growing concern, Ms. Roberts said. "The problem is spreading and is far beyond the Western states," she said.

Because of these skyrocketing costs, it will be very difficult to realize profits this year, even with the higher rates, Ms. Roberts said. She predicted current trends won't moderate until 2004. "The claim trends, without tort reform, will continue unabated," she said.

High claims costs, combined with low investment returns, mean that underwriting profits are more important than ever, Ms. Roberts said. A disciplined underwriting approach "will be the only way to survive," she said.

One area where profits are strong is in property insurance, said E.G. Lassiter, the president and CEO of Royal Specialty Underwriting Inc. in Atlanta. "If you're not having a profitable property year in 2001, you're doing something wrong," Mr. Lassiter said.

In 1998-99, property coverage was underpriced, pushing combined ratios to over 110%, Mr. Lassiter noted. Rates began to climb in late 1999 to lower these ratios and deliver returns on equity in the range of 12% to 15% range, he said.

Rates are up between 30% and 100% in 2002, with a greater emphasis on underwriting. In addition, a relative lack of catastrophes this year has helped to push up profits. But rates won't moderate any time soon, Mr. Lassiter warned, because property lines need to contribute profits to offset losses in other areas.

He also noted that reinsurance rates have risen dramatically, forcing direct insurers to raise rates. "Clearly, these costs are being passed along," he said.

As a result of high rates, reinsurance purchasing is down, Mr. Lassiter said. "People are buying less coverage as it costs so much," he said.

Mr. Williamson said that reinsurance premiums have dropped by 3.1% in the first six months of 2002, compared with the same period in 2001. "This has gone beyond a hard market to a very tight market," he said.