NU Online News Service, May 8, 2:07 p.m.EDT

Overcapitalization, high surplus and low-investment returns arekeeping insurance rates out of balance and masking the true stateof the market, according to two industry executives.

In a keynote address at the Advisen Casualty Insights ConferenceMay 1 in New York, Mark Lyons, chief executive officer of ArchWorld Wide Insurance Group said overcapitalization is hiding losseson business.

“We have had $12 billion in reserves releases in the 2011calendar year alone, for the accident years 2010 and prior releasedacross the U.S. industry,” he said. “It's been three loss-ratiopoints of reserve releases over the past 3-4 years on average.It's sheltering losses on current-year business and masking howunprofitable current business is because of releases in this yearfrom accidents which occurred prior.”

Pointing to industry-underwriting deficiencies, he noted thatthe U.S. property and casualty industry has made an underwritingprofit just five times in the past 35 years. Historically,investment income has been the panacea to overcome these losses,but recently it has fallen short of administering theremedy.

Lyons said the true state of the market is masked by slightupward movement in rates along middle-market businesses, propertylines and worker's compensation.

And while he believes there is room for measured optimism—sinceindustry barometers Market Scout, Advisen, CIAB and CLIPS agreethat rates are improving—he said there has not been enough marketpain to cause agreement on the degree of increases.

Lyons said that, without money coming in, approximately $100billion would need to be liquidated out of the industry in orderfor a hard market to set in. This could come from catastropheevents, through the industry shoring up its reserve position, frominterest-rate increases, or when the bonds that insurers have onthe books are marked down and their assets dropped.

Lou Iglesias, president of property & casualty at AlliedWorld, added at the Advisen conference that industry surplus hit arecord of $565 billion in March 2011 and dropped by just 1.6percent by the end of the year.

He also pointed to lower demand for insurance products, asdemand levels are determined by the overall strength of theeconomy, which is predicted to grow by a sluggish 3 percent through2012.

Iglesias suggested several steps thatunderwriters can take to help balance their business in the“Jell-o” market: address the strength of their risk selectioncriteria; practice adequate underwriting discipline; set adequaterates, terms and conditions; utilize predictive modeling tools; andmost importantly, educate staff.

Regarding education, he said, “Years ago, Travelers, Hartfordand Cigna all had training centers. Now we put people in anenvironment where they are expected to pick it up as they go along,or find a mentor who may be able to 'show them the ropes'—but noone has time to do that anymore.”

Iglesias also said insurers can re-allocate capital to growthareas like new lines of business and new geographical venues wherethey can make a margin instead of averaging it down.

He also recommended that brokers and risk managers consult oneanother to locate attractive exposures, and even drop biasesagainst certain lines of business.

And even though it may be difficult to be confident about thestate of the industry, the audience was reminded, they must remainconfident businesspeople. Reassured Iglesias, “large barriers toentry are good: they eliminate competition.”