Perhaps the best thing that can be said about 2008 is that it isover. The recession that undermined the economy all year long is avicious one, systematically destroying financial markets,institutions, jobs and confidence--all of which impact theprospects for property-casualty insurer growth and profitability in2009. However, p-c insurers are standing strong amid generalweakness in the overall financial services sector.

Indeed, insurers are making good on their past commitments, andare poised to facilitate the economic recovery tocome--particularly if the new president, Barack Obama, comesthrough with the massive stimulus package he has on the drawingboard, which could generate welcome business activity, newinfrastructure projects and exposure growth for carriers of manylines.

The global economic meltdown of 2008 has often been likened tothe Great Depression, but generally speaking, that analogy isincorrect. Indeed, more than a year-and-a-half into the crisis,employment, wages, prices--even stocks--have held up much betterthan they did in the 1930s.

Few appreciate the fact that concerted and coordinated effortsby the U.S. Treasury and Federal Reserve and their counterpartsaround the globe have already prevented the type of financialmaelstrom that sucked the planet into a decade of economic despairsome 80 years ago.

In terms of the impact on macroeconomic activity such asmanufacturing, home construction and employment--which driveinsurance exposure, and ultimately premium growth--the twinrecessions of the early 1980s are a much better analogy.

The stock market meltdown is not unlike the dot.com bust andpost-9/11 crash earlier this decade, and several others in the1970s and 1980s. It is the broad loss of faith in financialinstitutions, the depletion of personal wealth, and the evaporationof consumer and business confidence that beg comparisons with the1930s.

What about the property-casualty insurance industry? To be sure,the industry has taken its lumps. But while the impact of turmoilin the financial markets affects individual insurers differently,the industry as a whole remains fundamentally strong.

The basic function of insurance--the orderly transfer of riskfrom client to insurer--continues without interruption. This meansthat insurers today continue to sell and renew policies, payclaims, and develop new products to protect people's property,businesses and lives.

More importantly, unlike banking, insurance markets arefunctioning normally. Twenty-five banks failed in 2008 as a resultof the financial crisis, but not a single insurer followedsuit.

Still, the industry's $445 billion in premiums are drawn fromevery hard-hit Main Street in America. Consider this:

o Home and auto insurance account for nearly half of totalrevenues, but new home and car sales have crashed to their lowestlevels in decades and show little signs of recovery. The 60 percentplunge in new home construction since 2005 reduces premium growthin the homeowners insurance line by at least $1 billionannually.

o Insurance sales to businesses yield $225 billion in premium,yet most are scaling back production and employment.

o Workers' compensation would appear to be especially vulnerableto the swooning economy, with more than two million jobs lost in2008, and two million more expected to be lost in 2009 and 2010. Aloss of four million jobs would bring growth in the payrollexposure base to a halt and cause the loss of nearly $1.3 billionin workers' comp premium (or its self-insured equivalent).

o Other key lines have similarly been hurt by the recession,such as private passenger and commercial auto, commercial property,and inland and ocean marine.

In the end, the recession that began in December 2007 will costinsurers billions of dollars in lost business opportunities beforeit is over. The consensus view among economists is that arecovery--an anemic one at that--will not begin until late2009.

The reality, however, is that recessionary impacts on p-cinsurance premiums have historically been quite modest, especiallyin comparison to other sectors of the economy--such asconstruction, manufacturing and retail trade. For example, the $1.3billion loss in workers' comp premiums and the self-insuredequivalent work out to about 1 percent of private and state fundpremiums written.

Home insurers may be losing out on about $1 billion in premiumsannually due to the crash in new construction, but that's money theindustry never had to begin with. Insurers will continue to insurethe entire existing stock of homes, which generates about $55billion in premiums annually.

The bottom line is that while the p-c insurance industry is byno means immune to the macroeconomic forces buffeting the economytoday, it is highly resilient.

Overall, 98-to-99 percent of the industry's total premiums aregenerated on a renewal basis, in large part because most insurancepurchases are nondiscretionary.

These factors act as a firewall between the industry and thebroader economy, and are a major distinguishing feature between p-cinsurance and the industries it insures.

Thus, while homebuilders' fortunes plunged as sales fell by 60percent between 2005 and 2008, there was no impact on the number ofhomes in need of insurance.

Likewise, auto manufacturers over the same period suffered a 21percent decline in new car and truck sales, but the number ofvehicles on the road in need of insurance is little changed. Tovarying degrees the same story holds for insurance sold onaircraft, ships, infrastructure, employees and most types ofliability coverage (as tort threats are entirely resistant toeconomic downturns).

The current recession has savaged the U.S. economy withbreathtaking speed. Within a year of its start in December 2007, ithad toppled some of mightiest names on Wall Street, spread fear andpanic throughout the global financial system, forced the effectivenationalization of major financial institutions, and frozen globalcredit markets--in addition to claiming more than two millionAmerican jobs.

Indeed, were this recession a hurricane, it would be a strongCategory 4 on the Saffir-Simpson scale.

One signature feature of the current economic crisis, of course,is the ravaging of financial assets. So, what kind of beating didthe industry's investment portfolio--valued at $1.3 trillion atyear-end 2007--take in 2008, and with what implications?

Through the first nine months of 2008 alone, the p-c insuranceindustry racked up realized and unrealized capital losses of $9.7billion and $31.1 billion, respectively--dragging down policyholdersurplus by $43.3 billion, or 8.3 percent, from its year-earlierpeak.

Although some of these losses came from the usualrecession-driven plunge in stock prices, significant losses wererecorded in virtually every category of the fixed-income market,which accounts for two-thirds of insurer assets.

Among the more unusual casualties in the 2008 credit marketbloodbath were municipal bonds, investment-grade corporate bonds,foreign bonds, real estate as well as the now somewhat morenotorious category of investments--including residential andcommercial mortgage-backed securities, collateralized debtobligations and asset-backed securities (backing such things ascredit card receivables, vehicle loans and student loans).

The lesson of 2008 is not that all investments are bad, butrather something far more elemental--insurers have just two sourcesof revenue: premiums and investment earnings. When one falls, theother has to pick up the slack.

Hurricanes, auto accidents, workplace injuries and lawsuits willoccur no matter what happens in the investment markets, so WallStreet's disastrous performance in 2008--coupled with record-lowinterest rates and the possibility of more turmoil in the year(s)ahead--serves as a stern reminder that the industry's long-termsurvival is first and foremost tied to its ability to consistentlygenerate underwriting profits.

There are hopeful signs this lesson is becoming betterunderstood within the industry. Although insurers ran anunderwriting loss in 2008 ($19.9 billion through Sept. 30) duelargely to some $25 billion in catastrophe losses, three of theprevious four years were in the black.

Indeed, were it not for the distortionary effects of losses frommortgage and financial guaranty insurers as well as outsizedcatastrophe losses, the p-c industry might well have recorded itsthird consecutive underwriting profit in 2008.

The "art" of underwriting for a profit--a combined ratio under100--was only recently rediscovered. In the quarter-century between1979 and 2003, the industry failed to generate even a singleunderwriting profit, but did manage to run up $465 billion inunderwriting losses.

Journey back further in history and the story is entirelydifferent. In the 33 years from 1956 through 1978, insurers enjoyedunderwriting profits in 21 of them.

Traveling back still further in time, we find that insurers ranunderwriting profits in all but six years during the 36-yearinterval between 1920 and 1955--including 10 of the 13 yearsaffected by the Great Depression (1929-1941), which so many havelikened to the current era.

Throughout the entirety of the period from the 1920s through theearly 1970s, interest rates were relatively low, as they are today,and the 89 percent drop in the market crash that began in 1929instilled a justifiable and indelible wariness about investing instocks. Generations of insurance industry management understoodthat investment income should be treated like "icing on the cake,"but that long-run success was contingent on sustained underwritingprofitability.

No management team of any insurer operating in 2009 was trainedto think in this way--hence the need to rediscover the "art" ofunderwriting profitability. It is too soon to tell whether thislost art has been permanently rediscovered, but results since 2004are encouraging.

Regulators, too, must comprehend and quickly accept that the eraof significant offsets to premium rates through investment earningsis over.

They must also recognize that the industry's cost ofcapital--the rate of return necessary to attract money into thebusiness, and then retain it--has risen as the global financialcrisis has caused once vast pools of liquidity to shrivel.Regulators must also act accordingly, allowing insurers to earn arisk-appropriate rate of return that accurately reflects the newinvestment reality.

The election of Barack Obama in 2008 was ultimately a referendumon economic issues. As president, Mr. Obama has pledged to embarkon a two-year economic stimulus program that will direct some $675billion to $775 billion in spending on a wide variety of projects.The Obama administration hopes that the spending will create orpreserve three million jobs.

A significant share of the spending will be allocated towardinvestments in infrastructure, energy, health and education. Thisshould increase the demand for many types of commercialinsurance.

In the case of workers' comp, for example, a rough estimatewould suggest that as much as $960 million in workers' comppremiums will flow to insurers from employers working on stimulusprojects.

If the stimulus plan and companion efforts to thaw creditmarkets help boost consumer confidence, personal lines insurerswill benefit as well, albeit with a lag.

Meanwhile, the near collapse of the U.S. financial system in2008 assures a regulatory tsunami will sweep the financial servicessector in 2009. This much the Obama administration andcongressional leaders have already vowed.

The degree to which this will affect p-c insurers is unclear atthis early juncture.

Efforts at the federal level will likely be focused onidentifying nodes of systemic risk that could give rise to futurefinancial crises, forcing changes in how much risk can be assumedand how it is managed, and coupled with tighter oversight.

Property-casualty insurance, so far, is not among the mostworrisome risk nodes, and the conservative approach of this segmentto risk management could allow p-c insurers to emerge from thefinancial crisis and ensuing regulatory backlash with theiroperating model more intact than any other segment.