Despite an impressive underwriting performance in the first half of 2006, the insurance industry faces a number of red flags in the coming months, warns one expert.

Robert Hartwig, chief economist for the Insurance Information Institute, said that sluggish premium growth in the first six months of the year, as well as new capital accumulation, remain dangers for an industry seeking to stay strong through 2007.

The Insurance Services Office and the Property Casualty Insurers Association of America reported Monday net income for the first six months fell 9.3 percent, or $2.9 billion, compared to the same 2005 period, primarily due to investment losses.

On the other hand, the industry's 92 combined ratio was the best in the two decades that the quarterly records have been kept.

Mr. Hartwig said that the "sluggish" first six months 2.9 percent increase in premium growth reflected a virtual across-the-board softening of the personal and commercial lines pricing environment outside the catastrophe prone areas and lines.

And regulators have contributing to shrinking growth by "refusing to allow insurers to charge risk-based rates," Mr. Hartwig asserted.

"Some insurers may be also be paying more for reinsurance, which causes them to report lower 'net' written premium growth figures if they cannot fully recoup those costs at the retail level," he said.

Meanwhile, alternatives to traditional private insurance, including captives, self-insurance arrangements and large deductibles have also contributed to the slow growth.

Also, insurer pullbacks from coastal areas are resulting in the ceding of significant share to state-run residual market mechanisms, often in states that otherwise offer significant growth opportunities, he said.

Mr. Hartwig said that an unhealthy rapid accumulation of capital also threatens the industry, making it less attractive to investors as well as possibly spurring price competition.

"The primary consequence of rapid capital accumulation is to produce lower returns on equity, a problem that is exacerbated in an economic environment with limited opportunities for organic or merger-driven growth," he said.

Moreover, the record losses of 2004-05 have not only driven ratings agencies to require insurers to hold more capital for the risks they taken, but have also made the insurers themselves more risk averse, thus limiting their opportunities.

The new capital that has flowed into the industry from hedge funds' investments in Bermuda deals, along with the expansion of Lloyd's syndicate operations stateside have also contributed to these opportunities and dangers, according to Mr. Hartwig.

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