With more analytical tools and gauges to monitor property and casualty insurance price changes available than ever before, industry participants have probably watched the six-year-old soft market more closely than any that came before.

This year, the measurement needles barely moved, and the catalysts that have historically inflated premiums to end prior soft markets were nowhere to be found.

The feeling of being stuck in neutral territory–with few signs of price surges and no major indicators of precipitous price drops either–prompted some to suggest that stable to moderately declining price levels represent a "new normal" for the industry.

More recently, an analyst from Moody's Investors Service, charting the movement of commercial insurance pricing barometers published monthly by Dallas-based MarketScout, said "the industry appears to be entering a pricing 'double dip' with no end to the current soft market in sight."

Moody's Vice President Paul Bauer noted, for example, that even though the magnitude of average price drops had decreased–from a level of minus 5 percent in November 2009 to smaller declines averaging 3 percent in the months of May through July–the November 2010 barometer dipped back to minus 5 percent once again.

Predictions of a year-end 2010 turn have been few and far between, with those insurance executives who ascribed to the most optimistic price-change theories early in the year pointing to the erosion of loss reserve cushions as one potential factor that might prompt upward price movements.

Recently, analysts from both Moody's and Fitch Ratings reported that reserve levels are roughly adequate, with little or no redundancies left from prior years to offset potentially unfavorable loss trends going forward. Neither suggested, however, that the depletion would change the direction of the market by itself.

"The change in reserve strength signals a slight change in balance sheet quality," Fitch said. "While favorable reserve development is masking…poor underwriting performance, Fitch does not believe that a reduction in reserve adequacy alone will promote a hardening of rates," the Chicago-based firm said, noting that loss cost trends in casualty lines remain relatively stable.

Moody's came to the same conclusion. "At present, no catalyst for a turnaround is apparent, particularly given that the industry just came through a hurricane season with little adverse impact, which may further reduce pricing in property markets," Mr. Bauer wrote in a recent report.

Still, insurers move into 2011 facing a host of challenges–including low interest rates, large concentrations of municipal bond investments, uncertain impacts of health care reforms on medical costs. But even analysts bold enough to suggest that "insurance markets are teetering" on the brink of change quickly find reasons to hold back on forecasting near-term hardening.

"A pop in loss cost inflation, another round of investment portfolio losses, or a major loss event could push the industry into action," analysts at Keefe, Bruyette & Woods wrote in a recent December report titled "2011 Outlook: Stop Waiting For the Sky to Fall." But weaker loss reserve positions don't mean insurers are feeling any pain, they said, noting that carrier managements have conservatively recorded progressively higher accident-year loss ratios in recent years.

"Doesn't history show that surprisingly bad results must be reported in order for a turn to occur," they added.

"The bottom line is that capital remains abundant," with premium-to-equity ratios near historical lows, they said.

Throughout the year, most industry experts put the timing of a market turn out into 2011–and more recently into 2012–focusing on these same economics of supply and demand to support their predictions.

"Prices are now at the lowest point they have been in a decade, but the market is overcapitalized, and demand is weak," said David Bradford, executive vice president of New York-based Advisen.

Presenting a purely mathematical analysis, Mr. Bradford looked at ratios of U.S. industry policyholders' surplus-to-GDP over past cycles, finding that when the ratio reaches a level of 3.2 percent–as it did in 2004–the market historically shifts to the next phase (hard or soft) within 12 months. Given a weak economy and strong levels of industry capital, the ratio is now around 3.6, he indicated in a recent Advisen report, suggesting that the market "may bottom out by 2012."

As of third-quarter 2010, insurers had given back all the price gains of the 2001-2003 hard market in some lines, he said. In particular, workers' compensation and general liability average premiums are now below fourth-quarter 2000 levels.

Through the first six months of 2010, aggregate industry net premiums were flat at $212.5 million, while surplus stood at $530.5 million–slipping just below a $540.7 million record posted in March.

"Zero [premium] growth during the first half…represents a marked improvement over the 4.2 drop during the same period last year, and the 3.7 percent drop recorded for full-year 2009," commented Robert Hartwig, president of the Insurance Information Institute. "The industry has not recorded positive premium growth on an annual basis since 2006," he observed.

"If the industry were to record negative growth for all of 2010, it would mark the fourth consecutive year of decline in premiums written," he said, noting that the last time net premiums written contracted for four consecutive years was during the Great Depression (1930 through 1933) after peaking in 1929.

Individually, some insurers and brokers bucked the negative growth trends with mergers and acquisitions in 2010. Notable transactions included Max Capital's $3.5 billion combination with reinsurer Harbor Point, Aon's $4.9 billion deal for Hewitt Associates, wholesaler AmWINS' acquisition of competitor Colemont, as well as smaller deals in which specialty insurers acquired crop insurance and accident-and-health businesses.

Art caption: Market gauges and barometers continued to point to underinflated soft pricing in 2010–and conditions may well persist into 2011, experts say.

Special Reports /

#1 Stuck In Neutral. When Will The Soft Market End?

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